Working capital management and its influence on profitability and sustainable growth
Abstract
This study aims to test the effect of working capital management on firms’ profitability and the effect of this relationship on sustainable growth. Our sample firms are 136 manufacturing firms listed in the Indonesian Stock Exchange from 2010 to 2017. We use data panel regression with fixed effect estimation model to analyze our data. The results demonstrate that working capital significantly affects firms’ profitability. However, working capital management does not exhibit a significant direct influence on sustainable growth but a significant indirect influence through firms’ profitability. Thus, this study suggests that firms need to manage their working capital to increase their profits and eventually to achieve sustainable growth. This study contributes by including sustainable growth in the analysis of the relationship between working capital and firm performance. In addition, this study will likely contribute to managers in efforts to increase sustainable growth for their enterprises through working capital management.
Keyword : working capital management, profitability, sustainable growth, cash conversion cycle, return on assets, manufacturing industry
How to Cite
Nastiti, P. K. Y., Atahau, A. D. R., & Supramono, S. (2019). Working capital management and its influence on profitability and sustainable growth. Business: Theory and Practice, 20, 61-68. https://doi.org/10.3846/btp.2019.06
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Bagh T, Nazir MI, Khan MA, Khan MA, Sadaf R (2016) The impact of working capital management on firms financial performance: evidence from Pakistan. International Journal of Economics and Financial Issues 6 (4): 1097-1105.
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Mannori E, Mohammad J (2012) The determinant of working capital management of manufacturing companies: case of Singapore firms. Research Journal of Finance and Accounting 3 (11): 15-23.
Mehta MSP (2017) Working capital management and firms’ profitability: evidence from emerging Asian countries. South Asian Journal of Business Studies 6 (1): 80-97. https://doi.org/10.1108/SAJBS-09-2015-0060
Misbah S, Anjum MJ, Aqdas MI, Khan N, Abdur M, Khan R (2015) The Relationship between working capital manage-ment and profitability: evidence from listed companies in Kuala Lumpur Stock Exchange (KSE) Malaysia. International Journal of Information Processing and Management 6 (1): 104-113.
Momčilović M, Begović SV, Tomašević S, Ercegovac D (2015) Sustainable Growth Rate: Evidence from agricultural and food enterprises. Management 20 (76): 63-75. https://doi.org/10.7595/management.fon.2015.0017
Mukherjee T, Sen SS (2018) Sustainable growth: a study on some selected banks in India. International Journal of Money, Banking and Finance 6 (1): 52-59.
Oseifuah EK, Gyekye A (2016) Cash conversion cycle theory and corporate profitability: Evidence from non-financial firms listed on the Johannesburg Stock Exchange. Journal of Accounting and Management 6 (9): 37-51.
Padachi K, Howorth C, Narasimhan MS (2012) Working capital financial preferences: the case of Mauritian manufacturing Small and Medium-Sized Enterprises (SMEs). Asian Aca-demy of Management Journal of Accounting and Finance 8 (1): 125-157.
Palombini NNV, Nakamura W (2012) Key factors in working capital management in the Brazilian market. Revista de Administração de Empresas 52 (1): 55-69. https://doi.org/10.1590/S0034-75902012000100005
Panda AK, Nanda S (2018) Working capital financing and corporate profitability of Indian manufacturing firms. Ma-nagement Decision 56 (2): 441-457. https://doi.org/10.1108/MD-07-2017-0698
Pass C, Pike R (1996) Management of working capital: a neglected. Innovation & Entrepreneurial Research 25 (1): 18-24. https://doi.org/10.1108/eb001430
Rădăşanu AC (2015) Cash-flow sustainable growth rate models. Journal of Public Administration, Finance and Law (7): 62-70.
Raheman A, Afza T, Qayyum A, Bodla MA (2010) Working capi-tal management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics 47: 151-163.
Raheman A, Nasr M (2007) Working capital management and profitability-case of Pakistani firms. International Review of Business Research Papers 3 (1): 279-300.
Rahim N (2017) Sustainable growth rate and firm performance: a case study in Malaysia. International Journal of Management, Innovation & Entrepreneurial Research 3 (2): 48-60. https://doi.org/10.18510/ijmier.2017.321
Shapiro AC, Balbirer SD (2000) Modern corporate finance: a multidisciplinary approach to value creation. New Jersey: Prentice Hall.
Smith KV (1973) State of the art of working capital mana-gement. Financial Management 2 (3): 50-55. https://doi.org/10.2307/3664987
Vural G (2012) Affects of working capital management on firm’s performance: evidence from Turkey. International Journal of Economics and Financial Issues 2 (4): 488-495.
Wasiuzzaman S (2015) Working capital and profitability in manufacturing firms in Malaysia: an empirical stu-dy. Global Business Review 16 (4): 545-556. https://doi.org/10.1177/0972150915581098
Adekola A, Samy M, Knight D (2017) Efficient working capital management as the tool for driving profitability and liquidity: a correlation analysis of Nigerian companies. International Journal Business and Globalisation 18 (2): 251-275. https://doi.org/10.1504/IJBG.2017.081957
Afrifa GA (2015) Working capital management practices and profitability of AIM Listed SMEs. Journal of Enterprising Culture 23: 1-23. https://doi.org/10.1142/S0218495815500016
Afrifa GA, Tingbani I (2018) Working Capital management, cash flow and SME’s performance. International Journal Banking, Accounting, and Finance 9: 19-43. https://doi.org/10.1504/IJBAAF.2018.10010466
Ahmad B, Samim MM (2018) Working capital management effi-ciency and corporate governance in manufacturing sector of Pakistan working capital management efficiency and corpora-te governance in manufacturing sector of Pakistan. European Online Journal of Natural and Social Science 7 (1): 67-87.
Al-abass HS (2018) Effect of working capital management on profitability of cement sector listed companies. Finance and Management Sciences 8 (1): 137-142. https://doi.org/10.6007/IJARAFMS/v8-i1/3927
Altaf N, Shah FA (2018) How does working capital manage-ment affect the profitability of Indian companies? Journal of Advances in Management Research 15 (3): 373-366. https://doi.org/10.1108/JAMR-06-2017-0076
Amouzesh N, Moeinfar Z, Mousavi Z (2011) Sustainable growth rate and firm performance: evidence from Iran stock ex-change. International Journal of Business and Social Science 2 (23): 249-255.
Ashta A (2008) Sustainable growth rates: refining a measure. Briefings in Entrepreneurial Finance 214: 207-214. https://doi.org/10.1002/jsc.827
Atta S, Javed H, Khalil MJ, Ahmad I, Nadeem M (2017) Re-lationship between working capital and corporate perfor-mance in the textile sector of Pakistan. International Journal of Family Business and Management 1: 1-5. https://doi.org/10.15226/2577-7815/1/1/00106
Attom BE (2016) Working capital management as a financial strategy to improve profitability and growth of micro and small scale enterprise. International Journal of Research in Commerce and Management 7 (7): 42-50.
Bagh T, Nazir MI, Khan MA, Khan MA, Sadaf R (2016) The impact of working capital management on firms financial performance: evidence from Pakistan. International Journal of Economics and Financial Issues 6 (4): 1097-1105.
Baltagi BH (2005) Econometric analysis of panel data (3rd Edit). New York: John Wiley & Sons.Barine MN (2012) Working capital management efficiency and corporate profitability: Evidences from quoted firms in Ni-geria. Journal of Applied Finance & Banking 2 (2): 215-237.
Baron RM, Kenny DA (1986) The moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations. Journal of Perso-nality and Social Psychology 51 (6): 1173-1182. https://doi.org/10.1037/0022-3514.51.6.1173
Churchill NC, Mullins Lj (2001) How fast can your company afford to grow? Harvard Business Review 79 (5): 135-143.Deloof M (2003) Does working capital management affect pro-fitability of Belgian firms? Journal of Business Finance & Accounting 30 (May): 573-588. https://doi.org/10.1111/1468-5957.00008
Fonseka M, Ramos CG, Tian G-L (2012) The most appropriate sustainable growth rate model for managers and researchers. The Journal of Applied Business Research 28 (3): 481-500. https://doi.org/10.19030/jabr.v28i3.6963
Gill A, Biger N, Mathur N, Palmer S, Street WH, Vb-k BC (2010) The relationship between working capital management and profitability: evidence from The United States. Business and Economics Journal (2010): 1-9.Gitman LJ (2011) Principle of managerial finance (13th ed). New Jersey: Prentice Hall.
Hien Tran, Abbott M, Jin-Yap C (2017) How does working capital management affect the profitability of Vietnamese small and medium-sized enterprises? Introduction. Journal of Small Business and Enterprise Development 24: 2-11.
Higgins RC (1977) How much growth can a firm afford? Financial Management 6 (Fall): 7-16. https://doi.org/10.2307/3665251
IDN Financials (2018) Financial Data https://www.idnfinancials.com/pricing
Indonesian Stock Exchange (2018) Annual Report https://www.idx.co.id/en-us/about-idx/annual-report/
Koralun-Bereźnicka J (2014) On the relative importance of cor-porate working capital determinants: findings from the EU Countries. Contemporary Economics 8 (4): 415-434. https://doi.org/10.5709/ce.1897-9254.154
Lamptey LL, Frimpong K, Morrison AB (2017) Empirical study on the influence of working capital management on perfor-mance of SMEs in a developing economytle. British Journal of Economics, Management & Trade 217 (4): 1-10.
MacKinnon DP (2008) Introduction to statistical mediation analysis. Mahwah, NJ: Mahwah, NJ: Erlbaum.
Manaf NBA, Saad NBM, Mohamad NEAB, Ali IBM, Rahim NB (2018) Determinants of Sustainability Growth Rate (SGR) by using Zakon’s model to encounter with Shariah compliance requirements for Shariah securities compliance firms in Malaysia. International Journal of Industrial Management 4 (June): 61-69.
Mannori E, Mohammad J (2012) The determinant of working capital management of manufacturing companies: case of Singapore firms. Research Journal of Finance and Accounting 3 (11): 15-23.
Mehta MSP (2017) Working capital management and firms’ profitability: evidence from emerging Asian countries. South Asian Journal of Business Studies 6 (1): 80-97. https://doi.org/10.1108/SAJBS-09-2015-0060
Misbah S, Anjum MJ, Aqdas MI, Khan N, Abdur M, Khan R (2015) The Relationship between working capital manage-ment and profitability: evidence from listed companies in Kuala Lumpur Stock Exchange (KSE) Malaysia. International Journal of Information Processing and Management 6 (1): 104-113.
Momčilović M, Begović SV, Tomašević S, Ercegovac D (2015) Sustainable Growth Rate: Evidence from agricultural and food enterprises. Management 20 (76): 63-75. https://doi.org/10.7595/management.fon.2015.0017
Mukherjee T, Sen SS (2018) Sustainable growth: a study on some selected banks in India. International Journal of Money, Banking and Finance 6 (1): 52-59.
Oseifuah EK, Gyekye A (2016) Cash conversion cycle theory and corporate profitability: Evidence from non-financial firms listed on the Johannesburg Stock Exchange. Journal of Accounting and Management 6 (9): 37-51.
Padachi K, Howorth C, Narasimhan MS (2012) Working capital financial preferences: the case of Mauritian manufacturing Small and Medium-Sized Enterprises (SMEs). Asian Aca-demy of Management Journal of Accounting and Finance 8 (1): 125-157.
Palombini NNV, Nakamura W (2012) Key factors in working capital management in the Brazilian market. Revista de Administração de Empresas 52 (1): 55-69. https://doi.org/10.1590/S0034-75902012000100005
Panda AK, Nanda S (2018) Working capital financing and corporate profitability of Indian manufacturing firms. Ma-nagement Decision 56 (2): 441-457. https://doi.org/10.1108/MD-07-2017-0698
Pass C, Pike R (1996) Management of working capital: a neglected. Innovation & Entrepreneurial Research 25 (1): 18-24. https://doi.org/10.1108/eb001430
Rădăşanu AC (2015) Cash-flow sustainable growth rate models. Journal of Public Administration, Finance and Law (7): 62-70.
Raheman A, Afza T, Qayyum A, Bodla MA (2010) Working capi-tal management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics 47: 151-163.
Raheman A, Nasr M (2007) Working capital management and profitability-case of Pakistani firms. International Review of Business Research Papers 3 (1): 279-300.
Rahim N (2017) Sustainable growth rate and firm performance: a case study in Malaysia. International Journal of Management, Innovation & Entrepreneurial Research 3 (2): 48-60. https://doi.org/10.18510/ijmier.2017.321
Shapiro AC, Balbirer SD (2000) Modern corporate finance: a multidisciplinary approach to value creation. New Jersey: Prentice Hall.
Smith KV (1973) State of the art of working capital mana-gement. Financial Management 2 (3): 50-55. https://doi.org/10.2307/3664987
Vural G (2012) Affects of working capital management on firm’s performance: evidence from Turkey. International Journal of Economics and Financial Issues 2 (4): 488-495.
Wasiuzzaman S (2015) Working capital and profitability in manufacturing firms in Malaysia: an empirical stu-dy. Global Business Review 16 (4): 545-556. https://doi.org/10.1177/0972150915581098