The impact of cash conversion cycle on firm profitability

Abstract

Purpose – The purpose of this paper is to seek to investigate the impact of cash conversion cycle (CCC) on performance (i.e. profitability) in Swedish small and medium-sized enterprises (SMEs) over the 2008-2011 period. Design/methodology/approach – The study uses a seemingly unrelated regression (SUR) model to analyse cross-sectional panel data covering 13,797 SMEs operating in four industries. Findings – The study provides empirical evidence that CCC significantly affects profitability. In addition, the firm-level control variables size, age, and industry affiliation significantly affect firm profitability. These findings imply that managers could increase firm profitability by improving their working capital management. Research limitations/implications – The present study is limited to a sample of Swedish SMEs in four industries; further research could examine the generalizability of these findings to other countries and industries. Practical implications – Improved working capital policy could improve firm profitability by reducing the firm's CCC, thereby creating additional firm value. In addition, the results can be used for other purposes, including monitoring of firms by auditors, debt holders, and other stakeholders. Originality/value – The present study contributes to the literature by employing a SUR model to analyse a comprehensive cross-sectoral sample in a high-tax environment. To the authors’ knowledge, this is the first empirical study to address this issue in the Swedish context based on a large data set covering SMEs in various industries.