The Impact of Working Capital Management on Profitability of Egyptian SMEs in Egypt

Abstract

Small and medium-sized businesses contribute significantly to the economic development of any nation and endeavor to enhance the business climate. One of the main areas that affects these small and medium enterprises and their profitability and sustainability in the market is working capital management. The goal of this paper is to analyze the relationship between working capital management and SMEs’ profitability in the Egyptian context. To achieve this goal, this article uses the annual reports of 576 SMEs for the time period 2018 to 2021 as this time period is a rich period that includes many events such as the pandemic of COVID-19 and the economic reform programs undertaken by the Egyptian government. The results of this paper show that there is a significant negative relationship between working capital management as measured by the cash conversion cycle and profitability as measured by ROA and ROE, the paper also select firm size and firm industry as control variables. Given the focus of the Egyptian government on SMEs and their sustainability, the results of this paper can be beneficial for decision makers, banks and investors on how working capital management can significantly affect the financial performance of SMEs in Egypt.