Abstract
The aim of this study was to investigate the relationship between cash conversion cycle and firm performance of small and medium-sized entities (SMEs) in Nigeria. SMEs are potentials for Nigerian economy growth; contributing to gross domestic product, employment generation, poverty reduction and industrialization. The study employed the panel data regression analysis using financial data from a sample of 311 Nigerian SMEs for the period 2007-2013. The findings of the study revealed a negative association between cash conversion cycle, inventory holding period and accounts payable period with SMEs profitability; and a statistically significant negative relationship between accounts receivable period and SMEs’ profitability. The findings also found a significant positive relationship between firm size, leverage, growth opportunities and firm age and SMEs’ profitability. Thus, the result of the study indicates that Nigerian SMEs with a shorter cash conversion cycle and low growth opportunities hold more cash. This study contributes to existing literature on the relationship between cash conversion cycle and SMEs’ profitability in developing economies. However, this study is limited to non-financial and non-service SMEs.
Highlights
The traditional approach to efficient working capital management is based on the concept of cash conversion cycle (CCC)
This study further examined the impact of cash conversion cycle and its components on the profitability of small and medium-sized entities (SMEs) by reviewing the trend of the phenomenon in an emerging economy with a less developed financial market, like Nigeria
This study focuses on three static panel data estimation models: the Pooled Ordinary Least Squares (OLS), Fixed Effects (FE) and Random Effects (RE)
Summary
The traditional approach to efficient working capital management is based on the concept of cash conversion cycle (CCC). Shin and Soenen (1998), Nobanee et al (2011), Raheman et al (2011), and Baños-Caballero et al (2012) describe cash conversion cycle as an additive and popular measure of efficient working capital management. Previous scholars such as García-Teruel and Martínez-Solano (2007), Samson et al (2012) and Baños-Caballero et al (2012) established that efficient working capital management is most significant to small and medium-sized entities. Questionable managerial proficiency and poor working capital management of SMEs made many credit institutions to be more sceptical to give loans to SMEs, which caused problems of inadequate financing for growth and sustainability as compared to large firms listed in the stock markets
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