profitability

Effectsofworkingcapital

managementonSMEprofitability

PedroJuanGarcı

´

a-TeruelandPedroMartı

´

nez-Solano

DeptartmentofManagementandFinance,FacultyofEconomyandBusiness,

UniversityofMurcia,Murcia,Spain

Abstract

Purpo–Theobjectoftherearchprentedinthispaperistoprovideempiricalevidenceonthe

effectsofworkingcapitalmanagementontheprofitabilityofasampleofsmallandmedium-sized

Spanishfirms.

Design/methodology/approach–Theauthorshavecollectedapanelof8,872smallto

medium-sizedenterpris(SMEs)horstestedtheeffectsof

workingcapitalmanagementonSMEprofitabilityusingthepaneldatamethodology.

Findings–Theresults,whicharerobusttotheprenceofendogeneity,demonstratethatmanagers

cancreatevaluebyreducingtheirinventoriesandthenumberofdaysforwhichtheiraccountsare

er,shorteningthecashconversioncyclealsoimprovesthefirm’sprofitability.

Originality/value–,noprevioussuch

,unlikepreviousstudies,inthecurrentworkrobusttest

istoensurethatthe

relationshipsfoundintheanalysiscarriedoutareduetotheeffectsofthecashconversioncycleon

corporateprofitabilityandnotviceversa.

KeywordsWorkingcapital,Profit,Smalltomedium-sizedenterpris

PapertypeRearchpaper

uction

Thecorporatefinanceliteraturehastraditionallyfocudonthestudyoflong-term

fichershaveparticularlyofferedstudiesanalyzing

investments,capitalstructure,dividendsorcompanyvaluation,amongothertopics.

Buttheinvestmentthatfirmsmakeinshort-termasts,andtheresourcesudwith

maturitiesofunderoneyear,reprentthemainshareofitemsonafirm’sbalance

,inthesampleudintheprentstudy,currentastsofsmalland

medium-sizedSpanishfirmsreprent69percentoftheirasts,andatthesametime

theircurrentliabilitiesreprentmorethan52percentoftheirliabilities.

Workingcapitalmanagementisimportantbecauofitffectsonthefirm’s

profitabilityandrisk,andconquentlyitsvalue(Smith,1980).Specifically,working

capitalinvestmentinvolvesatradeoffbetweenprofionsthat

tendtoincreaprofitabilitytendtoincrearisk,and,converly,decisionsthatfocus

onriskreductionwilltendtoreducepotentialprofi(1974)arguedthat

ly,

decisionsabouthowmuchtoinvestinthecustomerandinventoryaccounts,andhow

muchcredittoacceptfromsuppliers,arereflectedinthefirm’scashconversioncycle,

whichreprentstheaveragenumberofdaysbetweenthedatewhenthefirmmust

startpayingitssuppliersandthedatewhenitbeginstocollectpaymentsfromits

Thecurrentissueandfulltextarchiveofthisjournalisavailableat

/

FinancialsupportfromFundacio

´

nCajaMurciaisgratefullyacknowledged.

IJMF

3,2

164

InternationalJournalofManagerial

Finance

Vol.3No.2,2007

pp.164-177

qEmeraldGroupPublishingLimited

1743-9132

DOI10.1108/1743913

usstudieshaveudmeasuresbadonthecashconversioncycleto

analyzewhethershorteningthiscyclehaspositiveornegativeeffectsonthefirm’s

proficalevidencerelatingworkingcapitalmanagementand

profitabilityingeneralsupportsthefactthataggressiveworkingcapitalpolicies

enhanceprofitability(Joetal.,1996;ShinandSoenen,1998;forUScompanies;Deloof,

2003;forBelgianfirms;Wang(2002)forJapaneandTaiwanefirms).Thissuggests

thatreducingworkingcapitalinvestmentislikelytoleadtohigherprofits.

Thepreviousstudieshavefocudtheiranalysisonlargerfir,the

managementofcurrentastsandliabilitiesisparticularlyimportantinthecaof

thecompanies’astsareintheformof

,currentliabilitiesareoneoftheirmainsourcesofexternalfinance

becautheyencounterdifficultiesinobtainingfundinginthelong-termcapital

markets(PeternandRajan,1997)andthefinancingconstraintsthattheyface

(Whited,1992;FazzariandPetern,1993).Inthisrespect,ElliehaunandWolken

(1993),PeternandRajan(1997)andDanielsonandScott(2000)showthatsmalland

medium-sizedUSfirmsuvendorfi,

efficientworkingcapitalmanagementisparticularlyimportantforsmallercompanies

(PeelandWilson,1996).

Inthiscontext,theobjectiveofthecurrentworkistoprovideempirical

evidenceabouttheeffectsofworkingcapitalmanagementonprofitabilityfora

panelmadeupof8,872smalltomedium-sizedenterpris(SMEs)duringthe

,no

eofSpanish

SMEswasstudiedthatoperatewithintheso-calledcontinentalmodel,whichis

characterizedbyitslessdevelopedcapitalmarkets(LaPortaetal.,1997),andby

thefactthatmostresourcesarechanneledthroughfinancialintermediaries

(Pampillo

´

n,2000).AllthissuggeststhatSpanishSMEshavefeweralternative

sourcesofexternalfinanceavailable,whichmakesthemmoredependenton

short-termfinanceingeneral,gurc-Kunt

andMaksimovic(2002)suggest,firmsoperatingincountrieswithmoredeveloped

bankingsystemsgrantmoretradecredittotheircustomers,andatthesametime

theyreceivemorefiondcontributionis

that,unlikethepreviousstudies(Joetal.,1996;ShinandSoenen,1998;Deloof,

2003;Wang,2002)inthecurrentworkrobusttestsforthepossibleprenceof

istoensurethatthe

relationshipsfoundintheanalysiscarriedoutareduetotheeffectsofthecash

conversioncycleoncorporateprofitabilityandnotviceversa.

Ourfindingssuggestthatmanagerscancreatevaluebyreducingtheir

inventoriesandthenumberofdaysforwhichtheiraccountsareoutstanding.

Similarly,shorteningthecashconversioncyclealsoimprovesthefirm’s

profitability.

Fromthispoint,theworkisstructuredasfollows:inction2thetheoretical

foundationsofthestudyareprented;inction3thesampleandvariablesudare

described;inction4themethodologyemployedisoutlined,andinSection5the

analyscarriedoutandthefindingsareprented;finally,themainconclusionsare

discusd.

Workingcapital

165

ticalfoundations

Workingcapitalmanagementisasignificantareaoffinancialmanagement,andthe

administrationofworkingcapitalmayhaveanimportantimpactontheprofitability

andliquidityofthefirm(ShinandSoenen,1998).Firmscanchoobetweentherelative

benefitsoftwobasictypesofstrategiesfornetworkingcapitalmanagement:theycan

minimizeworkingcapitalinvestmentortheycanadoptworkingcapitalpolicies

,themanagementofafirmhastoevaluatethe

trade-offbetweenexpectedprofitabilityandriskbeforedecidingtheoptimallevelof

investmentincurrentasts.

Ontheonehand,minimizingworkingcapitalinvestment(aggressivepolicies)

wouldpositivelyaffecttheprofitabilityofthefirm,byreducingtheproportionofits

r,Wang(2002)pointsoutthatif

theinventorylevelsarereducedtoomuch,thefi,

asignificantreductionofthetradecreditgrantedmayprovokeareductioninsales

rly,increasingsupplierfinancingmayresultin

,theopportunitycostmayexceed20percent,

dependingonthediscountpercentageandthediscountperiodgranted(Wilner,2000;

Ngetal.,1999)

Ontheotherhand,andcontrarytotraditionalbelief,investingheavilyin

workingcapital(conrvativepolicy)mayalsoresultinhigherprofi

particular,maintaininghighinventorylevelsreducesthecostofpossible

interruptionsintheproductionprocessandoflossofbusinessduetothescarcity

ofproducts,reducessupplycosts,andprotectsagainstpricefluctuations,among

otheradvantages(BlinderandMaccini,1991).Also,grantingtradecreditfavors

thefirm’reditcanactasaneffectivepricecut

(Brennanetal.,1988;PeternandRajan,1997),incentivizescustomerstoacquire

merchandiattimesoflowdemand(Emery,1987),allowscustomerstocheck

thatthemerchanditheyreceiveisasagreed(quantityandquality)andto

ensurethatthervicescontractedarecarriedout(Smith,1987),andhelpsfirms

tostrengthenlong-termrelationshipswiththeircustomers(Ngetal.,1999).

However,thebenefitshavetoofftthereductioninprofitabilityduetothe

increaofinvestmentincurrentasts.

Mostempiricalstudiesrelatingtoworkingcapitalmanagementandprofitability

supportthefactthataggressiveworkingcapitalpolicienhanceprofi

particular,Joetal.(1996)providestrongevidenceforUScompaniesonthebenefitsof

dSoenen(1998)analyzetherelation

betweenthenettradecreditandprofitabilityforasampleoffirmslistedontheUS

esultsalsoshowstrongevidence

thatreducingthenettradecreditincreasfirms’profir,this

relationshipisnotfoundtobeverystrongwhentheanalysisisatthelevelofaspecific

industry(Soenen,1993).Morerecently,Deloof(2003)analyzesasampleoflarge

BelgianfiultsconfirmthatBelgianfirmscan

improvetheirprofitabilitybyreducingthenumberofdaysaccountsreceivableare

er,hefindsthatlessprofitablefirms

y,Wang(2002)analyzesasampleofJapaneand

Taiwanefirmsfrom1985to1996,andfindsthatashortercashconversioncycleis

relatedtobetteroperatingperformance.

IJMF

3,2

166

Thesresultscanbepartiallyexplainedbythefactthatthereareindustry

benchmarkstowhichfirmsadherewhenttingtheirworkingcapitalinvestment

policies(Hawawinietal.,1986).Thus,firmscanincreatheirprofitabilitybyreducing

investmentonaccountsreceivableandinventoriestoareasonableminimum,indicated

rmore,aspointedoutbySoenen(1993),

cashconversioncyclemanagementtriestocollectcashinflowasquicklyaspossible,

andtopostponecashoutflultwillbetheshorteningof

thecashconversioncycle.

dvariables

3.1Data

databawasdevelopedbyBureauvanDijk,andcontainsfinancialandeconomicdata

onEuropeancompanies.

Thesamplecomprissmallandmedium-sizedfiectionof

SMEswascarriedoutaccordingtotherequirementstablishedbytheEuropean

Commission’srecommendation96/280/CEof3rdApril,1996,onthedefinitionofsmall

andmedium-sizedfifically,thofirmsmeetingthefollowingcriteriaforat

leastthreeyearswerelected:

.fewerthan250employees;

.turnoverlessthane40million;and

.posssionoflessthane27millionoftotalasts.

Inadditiontotheapplicationoftholectioncriteria,ariesoffilterswereapplied.

Thus,theobrvationsoffirmswithanomaliesintheiraccountswereeliminated,such

asnegativevaluesintheirasts,currentasts,fixedasts,liabilities,current

liabilities,capital,depreciation,ationsofentryitemsfromthe

balancesheetandprofitandlossaccountexhibitingsignsthatwerecontraryto

y,1percentoftheextremevalues

ultofapplyingthefilters,the

finalsampleof38,464obrvationswasarrivedat.

Inordertointroducetheeffectoftheeconomiccycleonthelevelsinvestedin

workingcapital,informationabouttheannualGDPgrowthinSpainwasobtained

fromEurostat.

3.2Variables

Inordertoanalyzetheeffectsofworkingcapitalmanagementonthefirm’s

profitability,thereturnonasts(ROA)

variablewasdefinedastheratioofearnings,beforeinterestandtax,toasts.

Withregardstotheindependentvariables,workingcapitalmanagementwas

measuredusingthenumberofdaysaccountsreceivable,numberofdaysofinventory

respect,numberofdaysaccounts

receivable(AR)iscalculatedas365£[accountsreceivable/sales].Thisvariable

reprentstheaveragenumberofdaysthatthefirmtakestocollectpaymentsfromits

herthevalue,thehigheritsinvestmentinaccountsreceivable.

Thenumberofdaysofinventory(INV)wascalculatedas

365£[inventories/purchas].Thisvariablereflectstheaveragenumberofdaysof

Workingcapital

167

stockheldbythefistoragetimesreprentagreaterinvestmentin

inventoryforaparticularlevelofoperations.

Thenumberofdaysaccountspayable(AP)reflectstheaveragetimeittakesfirms

scalculatedas365£[accountspayable/purchas].The

higherthevalue,thelongerfirmstaketottletheirpaymentcommitmentstotheir

suppliers.

Consideringthethreeperiodsjointly,thecashconversioncycle(CCC)was

riableiscalculatedasthenumberofdaysaccountsreceivableplus

cashconversioncycleindicatesmoretimebetweenoutlayofcashandcashrecovery.

Togetherwiththevariables,controlvariableswereintroduced,suchasthesizeof

thefirm,thegrowthinitssales,(SIZE)wasmeasuredasthe

logarithmofasts,thesalesgrowth(SGROW)as(Sales

1

2Sales

0

)/Sales

0

,the

leverage(DEBT)(2003)inhisstudyoflarge

Belgianfirmsalsoconsideredtheratiooffixedfinancialaststototalastsasa

efirmsinhisstudysuchastsareasignificantpartoftotal

rtheprentstudyfocusonSMEswhofixedfinancialastsare

,companiesinthesampleinvestlittleinfixedfinancialasts(a

meanof3.92percent,butamedianof0.05percent).Nevertheless,theresultsremain

unalteredwhenthisvariableisincluded.

Furthermore,andsincegoodeconomicconditionstendtobereflectedinafirm’s

profitability,controlswereappliedfortheevolutionoftheeconomiccycleusingthe

variableGDPGR,whichmeasurestheannualGDPgrowth.

3.3Descriptionofsample

Currentastsandliabilitieshaveariesofdistinctcharacteristicsaccordingtothe

ctorofactivityinwhichthefi,TableIreportsthereturnonasts

andnumberofdaysaccountsreceivable,daysofinventory,anddaysaccountspayable

ingindustryandrvicesctorarethetwoctorswith

thehighestreturnontheirasts,hatarededicated

toagriculture,trade(wholesaleorretail),transportandpublicrvices,aresomeway

behindat7percent.

Withregardtotheaverageperiodsbyctor,onefinds,asonewouldexpect,that

thefirmsdedicatedtotheretailtrade,withanaverageperiodof38days,takeleasttime

ROAARINVAPCCC

Agriculture0.0771.45106.3883.0095.15

Mining0.10116.1483.77141.3758.54

Manufacturing0.08108.1296.93108.3396.81

Construction0.08145.0655.76145.6655.48

Retailtrade0.0738.0068.5156.8749.55

Wholesaletrade0.0797.9273.3377.7893.49

Transportandpublicrvices0.0794.9715.27110.8620.79

Services0.1086.4740.51120.426.94

Notes:ROA–measurereturnonasts;AR–numberofdaysaccountsreceivable;INVnumberof

daysinventories;AP–numberofdaysaccountspayable;CCC–cashconversioncycle

TableI.

Meanvalues,byctor

IJMF

3,2

168

uctionctorfirmsgranttheir

customersthelongestperiodinwhichtopay–memining

ctorfirms,oryis

storedlongestinagriculture,whilestocksarestoredleastinthetransportandpublic

tiontothenumberofdaysaccountspayable,retailers(56days)

followedbywholesalers(77days)remuchslower

intheconstructionandminingctors,takingmorethan140daysonaveragetopay

r,ashasbeenmentioned,thefirmsalsogranttheirown

eringalltheaverageperiodstogether,it

canbeenthatthecashconversioncycleisnegativeinonlyonector–thatof

explainedbytheshortstoragetimesthatare

respect,agriculturalandmanufacturingfirmstakethe

longesttimetogeneratecash(95and96days,respectively),andhenceneedthemost

resourcestofinancetheiroperationalfundingrequirements.

TableIIoffersdescriptivestatisticsaboutthevariablesudforthesampleasa

regenerallysmallfirms,withmeanastsofmorethane6million;their

returnonastsisaround8percent;theirnumberofdaysaccountsreceivableis

around96days;andtheirnumberofdaysaccountspayableisverysimilar:around97

erwiththis,thesamplefirmshaveentheirsalesgrowbyalmost13

percentannuallyonaverage,

theperiodanalyzed(1996-2002)theGDPhasgrownatanaveragerateof3.66percent

inSpain.

TableIIIshowsthecorrelationmatrixforthevariablesdefinedintheprevious

sasignificantnegativecorrelationbetweenthereturnonastsandthe

numberofdaysaccountsreceivable,

thesameway,thecorrelationwiththecashconversioncycleisnegativeand

signifimonstratesthatpayingsuppliersandcollectingpaymentsfrom

customerarlier,andkeepingproductsinstocklesstime,areallassociatedwithan

increainthefirm’sprofieringthethreeperiodsjointly,thenegative

correlationobtainedindicatesthatshorteningthecashconversioncycleisassociated

Median10thperc.90thperc.

ROA384640.07920.08340.06780.00410.1768

AR3846496.829955.768296.296222.0945165.2533

INV3845277.214070.049959.30426.8692166.6171

AP3837197.809057.356893.807524.5344174.9668

CCC3837176.311790.641364.7704219.6907190.2017

ASSETS384646955.10904461.394.55541

SGROW326740.12990.31050.086220.09280.3492

DEBT352370.24740.18390.23060.00980.5021

GDPGR384640.03660.00750.04200.02400.0430

Notes:ROA–measurereturnonasts;AR–numberofdaysaccountsreceivable;INV–numberof

daysofinventory;AP–numberofdaysaccountspayable;CCC–cashconversioncycle;ASSETS–

valueofastsinthousandeuros;SGROW–salesgrowth,DEBT–financialdebtlevel;GDPGR–

annualGDPgrowth

TableII.

Descriptivestatistics

Workingcapital

169

R

O

A

A

R

I

N

V

A

P

C

C

C

S

I

Z

E

S

G

R

O

W

D

E

B

T

G

D

P

G

R

R

O

A

1

A

R

2

0.

0

4

1

9

*

*

*

1

I

N

V

2

0.

0

9

0

8

*

*

*

0.

0

8

0

5

*

*

*

1

A

P

2

0.

0

3

2

4

*

*

*

0.

3

5

5

5

*

*

*

0.

1

7

9

3

*

*

*

1

C

C

C

2

0.

0

7

5

*

*

*

0.

4

5

2

3

*

*

*

0.

7

0

8

7

*

*

*

2

0.

2

7

5

7

*

*

*

1

S

I

Z

E

0.

0

0

6

0.

2

7

3

*

*

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0.

1

5

3

7

*

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0.

1

1

6

8

*

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S

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0.

1

2

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B

T

2

0.

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1

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0.

0

7

7

6

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0.

1

1

9

8

*

*

*

2

0.

0

0

2

6

0.

1

4

2

3

*

*

*

0.

0

5

8

1

*

*

*

0.

0

1

1

6

*

*

1

G

D

P

G

R

0.

0

3

0

6

*

*

*

2

0.

0

0

6

3

2

0.

0

1

0

3

*

*

0.

0

0

7

6

2

0.

0

1

7

*

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0.

0

4

2

5

*

*

*

0.

0

6

7

2

*

*

*

2

0.

0

1

1

2

*

*

1

N

o

t

e

s

:

*

Si

g

ni

fi

c

a

n

t

a

t

9

0

p

e

r

c

e

n

t

;

*

*

Si

g

ni

fi

c

a

n

t

a

t

9

5

p

e

r

c

e

n

t

;

*

*

*

Si

g

ni

fi

c

a

n

t

a

t

9

9

p

e

r

c

e

n

t

;

R

O

A

–

m

e

a

s

u

r

e

r

e

t

u

r

n

o

n

a

s

s

e

t

s;

A

R

–

n

u

m

b

e

r

o

f

d

a

y

s

a

c

c

o

u

n

t

s

r

e

c

e

i

v

a

bl

e;

I

N

V

–

n

u

m

b

e

r

o

f

d

a

y

s

o

f

i

n

v

e

n

t

o

r

y;

A

P

–

n

u

m

b

e

r

o

f

d

a

y

s

a

c

c

o

u

n

t

s

p

a

y

a

bl

e;

C

C

C

–

c

a

s

h

c

o

n

v

e

r

s

i

o

n

c

y

c

l

e;

S

I

Z

E

–

c

o

m

p

a

n

y

s

i

z

e

;

S

G

R

O

W

–

s

a

l

e

s

g

r

o

wt

h;

D

E

B

T

–

fi

n

a

n

c

i

a

l

d

e

b

t

l

e

v

e

l

;

G

D

P

G

R

–

a

n

n

u

a

l

G

D

P

g

r

o

wt

h

TableIII.

Correlationmatrix

IJMF

3,2

170

withhigherprofitability,whichcouldjustifytheeffectthatamoreefficient

managementofworkingcapitalhasoncorporateprofitability.

Withregardtothecorrelationsbetweentheindependentvariables,highvaluesare

foundonlybetweenthecashconversioncycleandnumberofdaysaccountsreceivable

(0.45)andnumberofdaysofinventory(0.70).Thiswastakenintoaccountin

subquentanalysinordertoavoidpotentialmulticolinearityproblems.

ology

TheeffectsofworkingcapitalmanagementonSMEprofitabilitywastestedusingthe

fically,estimateswereobtainedforthefollowing

equations:

ROA

it

¼b

0

þb

1

AR

it

þb

2

SIZE

it

þb

3

SGROW

it

þb

4

DEBT

it

þb

5

GDPGR

it

þh

i

þl

t

þ1

it

ROA

it

¼b

0

þb

1

INV

it

þb

2

SIZE

it

þb

3

SGROW

it

þb

4

DEBT

it

þb

5

GDPGR

it

þh

i

þl

t

þ1

it

ROA

it

¼b

0

þb

1

AP

it

þb

2

SIZE

it

þb

3

SGROW

it

þb

4

DEBT

it

þb

5

GDPGR

it

þh

i

þl

t

þ1

it

ROA

it

¼b

0

þb

1

CCC

it

þb

2

SIZE

it

þb

3

SGROW

it

þb

4

DEBT

it

þb

5

GDPGR

it

þh

i

þl

t

þ1

it

WhereROAmeasuresthereturnonasts,ARthenumberofdaysaccounts

receivable,INVthenumberofdaysinventories,APthenumberofdaysaccounts

payable,CCCthecashconversioncycle,SIZEthecompanysize,SGROWthesales

growth,DEBTthedebtlevel,andGDPGRtheannualGDPgrowth.h

i

(unobrvable

heterogeneity)measurestheparticularcharacteristicsofeachfiametersl

t

aretimedummyvariablesthatchangeovertimebutareequalforallthefirmsineach

oftheperiodsconsidered.

Thismethodologyprentsimportantbenefincludethefactthatpanel

datamethodologyassumesthatindividuals,firms,statesorcountriesare

-riesandcross-ctiondatastudiesnotcontrollingforthis

rmore,paneldatagive

moreinformativedata,morevariability,lesscollinearityamongvariables,more

degreesoffreedomandmoreefficiency(Baltagi,2001).

Estimatingmodelsfrompaneldatarequirestherearchersfirsttodetermine

whetherthereisacorrelationbetweentheunobrvableheterogeneityh

i

ofeachfirm

eisacorrelation(fixedeffects),it

wouldbepossibletoobtaintheconsistentestimationbymeansofthewithin-group

i(randomeffects)amoreefficientestimatorcanbeachievedby

Workingcapital

171

estimatingtheequationbygeneralizedleastsquares(GLS).Thenormalstrategyto

determinewhethertheeffectsarefixedorrandomistoutheHausman(1978)test

underthenullhypothesisEðh

i

=x

it

Þ¼ullhypothesisisrejected,theeffects

areconsideredtobefixed,ull

hypothesisisaccepted,therewouldberandomeffects,andthemodelisthenestimated

waytheanalysiscanachieveamoreefficientestimatorofb.

s

5.1Univariateanalysis

Aunivariateanalysiswasconductedfirstinordertodetermineiftherearesignificant

differencesinthevariablesstudiedbetweenthemostandleastprofitablefirms.

TableIVreportstheaveragevalueofthevariablesofthestudyforeachquartileofthe

rtileswerecalculatedannually,sotherangeofvariationof

uently,aparametricdifferenceofmeanstest

wascarriedoutbadonstudent’st,todeterminewhethertheaveragevaluesofthe

fourthquartilearesignificantlydifferentfromthoofthefiatisticappears

inthefinalcolumnofTableIV.

Ingeneral,themeanvaluesofthevariablesstudiedaresignificantlydifferent

betweenthemostprofitable(fourthquartile)andleastprofitable(firstquartile)firms.

Thus,inthemostprofitablefirms,weobrveashorternumberofdaysaccounts

receivable,daysofinventoryanddaysaccountspayable,aswellasshortercash

firmsarealsolarger,andhavesuperiorsalesgrowthand

esultsareconsistentwiththecorrelationsprentedinTableIII.

1stquartile2ndquartile3rdquartile4thquartilet

RangeROA20.75to0.030.03to0.070.06to0.120.10to1.05

ROA20.00600.05060.08900.1851187.36

(0.0116)(0.0504)(0.0875)(0.1626)(0.00)

AR97.492099.434396.215593.667224.37

(93.3828)(98.5074)(97.4100)(95.2741)(0.00)

INV81.885683.227075.557265.5583215.04

(61.7877)(65.5985)(58.3610)(49.6316)(0.00)

AP97.0031102.427798.387394.191423.09

(92.0959)(100.1461)(95.0237)(88.7961)(0.00)

CCC82.431480.242773.414565.1350212.03

(66.6797)(67.0962)(62.9043)(57.7468)(0.00)

SIZE8.66638.71048.71238.68902.29

(8.6523)(8.6910)(8.6799)(8.6704)(0.00)

SGROW0.08440.11770.13790.178917.91

(0.0442)(0.0766)(0.0978)(0.1225)(0.00)

DEBT0.26350.29920.25450.1627235.69

(0.2483)(0.3012)(0.2420)(0.1227)(0.00)

Notes:Comparisonofmeanvaluesofvariablesinfunctionofreturnonastsquartiles;ROA

quartilescreatedannually;Medianvaluesinparenthes;ROA–measurereturnonasts;AR–

numberofdaysaccountsreceivable;INV–numberofdaysofinventory;AP–numberofdays

accountspayable;CCC–cashconversioncycle;SIZE–companysize;SGROW–salesgrowth;

DEBT–financialdebtlevel;tstatistictestsdifferenceofmeansbetween4thand1stquartile;P-value

inparenthes

TableIV.

MeanvaluesbyROA

quartiles

IJMF

3,2

172

However,theaveragevaluesofmanyofthevariablesdonotvarymonotonically

pliesthatcomparingthefirstand

fourthquarterisnotsufficienttodescribetherelationbetweenreturnonastsandthe

independentvariablesconsideredhere.

5.2Multivariateanalysis

TableVprentstheresultsobtainedafterregressingtheequations(1),(2),(3)and(4).

Thesignandsignificanceoftherelationsfoundissimilartothatfoundintheprevious

’sreturnonastsisreducedbylengtheningthenumberofdays

accountsreceivable,numberofdaysofinventoryandnumberofdaysaccounts

pect,whichisconsistentwiththeresultsfoundbyDeloof(2003)for

largefirms,underlinestheimportanceofworkingcapitalmanagementforfirms.

Lengtheningthedeadlinesforclientstomaketheirpayments,althoughitmayimprove

profitabilitybecaugreaterpaymentfacilitiesmayraisales,alsonegativelyaffects

profiorerestrictivecreditpolicygivingcustomerslesstimetomake

firm’sprofitabilitycanalsobeimproved

byreducingthenumberofdaysofinventory,sothatkeepinginventoryforlesstime

canalsoimproveprofieningthenumberofdaysaccountspayable

1234

AR20.0002

***

(214.93)

INV20.0001

***

(211.98)

AP20.0002

***

(216.55)

CCC20.0001

***

(26.05)

SIZE0.0186

***

0.0128

***

0.0181

***

0.0113

***

(9.06)(6.42)(8.92)(5.68)

SGROW0.0207

***

0.0203

***

0.0210

***

0.0215

***

(17.09)(16.59)(17.35)(17.64)

DEBT20.1337

***20.1354***20.1534***20.1331***

(230.12)(230.49)(234.20)(229.04)

GDPGR0.5408

*

0.8345

***

0.49020.9307

***

(1.63)(2.52)(1.48)(2.80)

C20.0476

**20.021220.0379*20.0203

(22.42)(21.08)(21.94)(21.04)

Hausman0.000.000.000.00

Obs.34130041

Notes:tstatisticinparenthes;*

Significantat90percent;

**

Significantat95percent;

***

Significantat99percent;Hausmanisp-valueofHausman(1978)hypothesisrejected,

pted,random-effectstimationisbestoption,since

notonlyisitconsistent,butitisalsomoreeffiependent

variable;ARmeasuresnumberofdaysaccountsreceivable;INVnumberofdaysofinventory;AP

numberofdaysaccountspayable;CCCcashconversioncycle;SIZEcompanysize;SGROWsales

growth;DEBTfinancialdebtlevel;sobtainedusingfixed-effects

ficientsoftimedummyvariablesnotprented

TableV.

Effectofworkingcapital

managementonreturnon

asts(I)

Workingcapital

173

negativelyaffectsprofi(2003)justifiesasimilarresultbyarguingthat

lessprofitablefiegratedanalysisofthe

numberofdaysaccountsreceivable,daysofinventoryanddaysaccountspayablewas

rasttoDeloof’s(2003)findingsfor

largeBelgianfirms,theprentstudyshowsthatshorteningthecashconversioncycle

improvesanSME’sprofitability.

Withreferencetothecontrolvariables,allofthearesignifiate

profitabilityispositivelyassociatedwithsize,sothatlargesizeemstofavorthe

generationofprofiultsdonotchangeifthelogarithmofsalesisudto

,whichcouldbeanindicatorofafirm’sbusiness

opportunities,isanimportantfactorallowingfirmstoenjoyimprovedprofitability,as

ametime,asone

wouldexpect,itimprovesinperiodsofhighereconomicgrowth.

Giventhatoperationalfinancingrequirementsdifferfromonectortoanother,all

regressionsinthispaperwerealsoestimatedcontrollingforthectorofactivityin

whichthefiheanalysiswasconductedusingpaneldata

,andin

ordertocarryouttheestimations,thenumberofdaysaccountsreceivable,daysof

inventoryanddaysaccountspayableandthecashconversioncyclewereconsideredto

bectorialcharacteristics,andsotheirrespectivectorialmeansweresubtracted

fromthevariablesAR,INV,ultsprenteddonotdifferwhen

controllingforpossiblectorialeffects,andtheyarenotprentedherebecauof

theirsimilarity.

Finally,testsrobusttothepossibleprenceofendogeneityproblemswerecarried

mportanttoensurethattherelationfoundintheanalysiscarriedouthere

wasduetotheeffectsofthecashconversioncycleoncorporateprofitabilityandnot

viceversa.

Indeed,asDeloof(2003)pointsout,theresultsobtainedmaybeaffectedbypotential

endogeneityproblems,insofarasthenumberofdaysaccountsreceivable,daysof

inventoryanddaysaccountspayablemaybeinfluencedbythefirm’sreturnonasts,

respect,thenegativerelationbetween

profitabilityandthenumberofdaysaccountsreceivableanddaysofinventorycould

beexplainediflessprofitablefirmsincentivizetheircustomersbygrantingthem

longerpaymentdeadlines,oriffirmswithfallingsalesandconquentlydeclining

profitsfi,thenegativerelationfoundbetween

profitabilityandnumberofdaysaccountspayablecouldbeaconquenceoffirms

withmoreproblems,andhencelowerprofits,(2003)in

hisarticlediscusstheendogeneityproblemsthatmightexist,buthedoesnot

specifidthepossibleeffectofthindogeneityproblem,

TableVIreportstheresultsobtainedafterregressingequations(1),(2),(3),and(4)

fically,thefirstlagofthevariablesAR,INV,AP

andCCCwereudasaninstrument.

Ingeneral,alltheresultsaresimilartothoofTableV,exceptthoforthe

variableAP,whichnowlossignifisultcastsdoubtontheeffectthat

delayingpaymentstosuppliersmayhaveonSMEprofis,themultiple

conflictingeffectsthatinfluenceintherelationshipbetweenROAandaccounts

payablecouldexplainwhythisrelationshipisnotsignificant.

IJMF

3,2

174

sions

Workingcapitalmanagementisparticularlyimportantinthecaofsmalland

thecompanies’astsareintheformofcurrent

,currentliabilitiesareoneoftheirmainsourcesofexternalfi

context,theobjectiveofthecurrentrearchhasbeentoprovideempiricalevidence

abouttheeffectsofworkingcapitalmanagementontheprofitabilityofasampleof

smallandmedium-sizedfiend,asampleofSpanishfirmswasudto

apanelof8,872SMEswas

collected,coveringtheperiodfrom1996to2002.

Theresultsaresimilartothofoundinpreviousstudiesthatfocudonlargefirms

(Joetal.,1996;ShinandSoenen,1998;Wang,2002;Deloof,2003),andtheanalys

carriedoutconfirmtheimportantroleofworkingcapitalmanagementinvalue

generationinsmallandmedium-sizedfisasignificantnegativerelation

betweenanSME’sprofitabilityandthenumberofdaysaccountsreceivableanddays

ot,however,confirmthatthenumberofdaysaccountspayable

affectsanSME’sreturnonasts,asthisrelationlossignificancewhenwecontrol

forpossibleendogeneityproblems.

1234

AR20.0008

***

(24.19)

INV20.0010

***

(212.47)

AP20.0018

(21.38)

CCC20.0006

***

(210.47)

SIZE0.0332

***

0.0254

***

0.07660.0154

***

(4.69)(8.60)(1.48)(5.87)

SGROW0.0368

***

0.0236

***

0.02530.0314

***

(11.64)(8.49)(1.55)(12.52)

DEBT20.1133

***20.1080***20.2532***20.0600***

(216.68)(219.06)(22.90)(26.89)

GDPGR20.24570.369522.89060.9547

***

(20.5)(0.97)(20.97)(2.57)

C20.0929

***20.0553**20.222320.0322

(22.75)(22.29)(21.28)(21.37)

Obs.25483254832548325483

Notes:zstatisticinparenthes;

*

Significantat90percent;

**

Significantat95percent;

***

Signifiependentvariable;ARmeasuresnumberofdaysaccounts

receivable;INVnumberofdaysofinventory;APnumberofdaysaccountspayable;CCCcash

conversioncycle;SIZEcompanysize;SGROWsalesgrowth;DEBTfinancialdebtlevel;GDPGR

mentud

isfirstlagofvariablesAR,INV,AP,ficientsoftimedummyvariablesnot

prented

TableVI.

Effectofworkingcapital

managementonreturnon

asts(II)

Workingcapital

175

Finally,SMEshavetobeconcernedwithworkingcapitalmanagementbecauthey

canalsocreatevaluebyreducingtheircashconversioncycletoaminimum,asfaras

thatisreasonable.

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Correspondingauthor

PedroJuanGarcı

´

a-Teruelcanbecontactedat:pjteruel@

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177

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