Working capital management and firm profitability: Evidence from SMEs in Malaysia

Abstract

Efficient working capital management is particularly important for Small and Medium Enterprises (SMEs) in coping with greater difficulty in accessing capital market. In this research, we investigate the importance of working capital management to SMEs by analyzing the influence of working capital management and its components (inventory, accounts receivable and account payable) to profitability of SMEs. By using a sample of SMEs listed on the ACE market – an alternative, sponsor-driven equity market designed for Malaysian SMEs during the period from 2010 to 2016, our findings suggest that managers of Malaysian SMEs can enhance profitability by holding a large amount of inventory, offering more trade credit to customers, and lengthening the cash conversion cycle.