Trends in working capital management and its impact on firms' performance : An analysis of Sri Lankan small and medium enterprises.

Abstract

A well designed and implemented working capital management is expected to contribute positively to the creation of a firm's value. The purpose of this paper is to examine the trends in working capital management and its impact on firms' performance. The trend in working capital needs and profitability, liquidity, solvency and value added of firms are examined to identify the causes for any significant differences between the industries. The dependent variables of working capital strategy, profits, liquidity, solvency and value added appropriately measured is used to investigate the status quo of a sample of 25 small and medium enterprises, using panel data analysis for the period 2009 – 2012. The correlation results show that: high levels of short term finance is positively associated with financial risk levels: the hardcore working capital extent also reflects positive relations with the cash conversion cycle whilst both profitability and solvency states records positively to the value added quantum. The regression results 'all sectors' shows that high profitability and solvency states are associated with higher levels of value added and dividends. The key variables used in this analysis are value added, dividend and earnings per share, net assets and return on investment. Strong significant relationships between the stipulated variables have also been found in previous empirical work. No hidden champions of best practice were evident within the industries. The findings also reveal an increasing trend in the short term component of working capital financing.