Conservative Working Capital Policy: Can it Increase Profitability and Sustainable Growth Rate?

Sunardi Sunardi Et Al

doi:10.17762/turcomat.v12i3.2237

Abstract

The objective of this study is to investigate the effect of conservative working capital policy on profitability and examine the effect of conservative working capital policy on sustainable growth mediated by profitability in the manufacturing sector in Indonesia. This study involves 133 manufacturing firms in Indonesia during the 2013-2018 period. Data are analyzed using panel data regression with random effects estimation models. The result of this study showed that conservative working capital policy, both investment and financing policy, has proven to have a positive effect on sustainable growth rate. Besides, this study also proved that profitability has a positive effect on SGR. Furthermore, there was the effect of conservative working capital policies on the level of sustainable growth through profitability. This study not only contributes to expanding knowledge about the relationship between working capital policies, profitability and sustainable growth rates, but also has relevant implications for firm managers to improve firm performance to be able to grow sustainably

Highlights

The financial literature has paid more attention to investing in financial instruments rather than investing in the firm's real assets
There are two types of policies namely; (a) conservative, if the firm chooses a low proportion of current asset investment and (b) aggressive, if the firm chooses a low proportion of asset investment (Gitman & Chad, 2012)
This study aims to examine the effect of conservative working capital policy on profitability and examine the effect of conservative working capital policy on sustainable growth mediated by profitability in the manufacturing sector in Indonesia

Summary

Introduction

The financial literature has paid more attention to investing in financial instruments rather than investing in the firm's real assets. There are two types of policies namely; (a) conservative, if the firm chooses a low proportion of current asset investment and (b) aggressive, if the firm chooses a low proportion of asset investment (Gitman & Chad, 2012). This type of policy applies to short-term financing. A conservative working capital policy has the potential to increase profits but face a high liquidity risk. An aggressive working capital policy has the potential to reduce profitability but has a low liquidity risk. This argument argues is still debatable given the empirical level, many studies in several countries that prove that conservative working capital policies have a positive effect on profitability (Nazir & Afza, 2009; Raheman et al, 2010; Adam et al, 2017; Nastiti, 2019)

Objectives

Methods

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Discussion

Conclusion