Working capital management in SMEs
Abstract
This paper analyses the determinants of Cash Conversion Cycle (CCC) for
small- and medium-sized firms. It has been found that these firms have a target
CCC length to which they attempt to converge, and that they try to adjust to
their target quickly. The results also show that it is longer for older firms and
companies with greater cash flows. In contrast, firms with more growth opportu-
nities, and firms with higher leverage, investment in fixed assets and return on
assets have a more aggressive working capital policy.
Key words: Cash conversion cycle;Working capital;Market imperfections; SMEs
JEL classification: G30, G31, G32
doi: 10.1111/j.1467-629X.2009.00331.x
1. Introduction
Corporate finance literature has traditionally focused on the study of long-term
financial decisions such as the structure of capital, investments, dividends and firm
valuations. However, Smith (1980) suggests that working capital management
is important because of its effects on a firm’s profitability and risk, and conse-
quently its value. Following this line of argument, some more recent studies have
focused on how reduction of the measures of working capital improves a firm’s
profitability (Jose et al., 1996; Shin and Soenen, 1998; Deloof, 2003; Padachi,
2006; Garcia-Teruel andMartinez-Solano, 2007a; Raheman and Nasr, 2007)
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