Profitability Effects of Working Capital Management: An Analysis of Swedish SMEs

Sammanfattning: The purpose of this thesis is to examine how the profitability in Swedish small and medium sized enterprises (SMEs) is affected by working capital management (WCM). The cash conversion cycle and its three elements (days in inventory, days accounts receivable and days accounts payable), which are utilised as measures of WCM, all show negative relationships with SME profitability when analysed with fixed effects regressions. The negative relationships between WCM and profitability are found to be pronounced in economic downturns, confirming previous research on large firms. It is shown that industry affiliation is an important factor since the negative relationships are found not to be valid across all industries. Though the use of linear spline regressions, SMEs' current level of working capital is additionally found to influence the profitability effects of WCM. Furthermore, a dynamic panel generalised method of moments (GMM) estimator is utilised in order to allow current values of WCM to be influenced by past profitability. SMEs wishing to improve profitability are advised to focus on the management of days in inventory. Days in inventory is found to have the largest impact on profitability and it is the only significant component of the CCC when the dynamic nature of the profitability-WCM relationship is accounted for.