Impact of Individual Components of Working Capital and Corporate Characteristics on Profitability: Evidence from Small and Medium Manufacturing Firms in the US

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Working capital is considered to be the fuel that keeps a business running. Efficient and effective utilisation of working capital have been stressed by many researchers. Small and medium enterprises (SMEs) have a pivotal role in the US economy. This study examines the impact of working capital components and corporate factors on the profitability of small and medium enterprises (SMEs), particularly in the engineering sector in the US. The secondary data is collected from a sample of 58 SMEs in the engineering sector listed on NASDAQ. The dependent variables used in the study include alternate proxies of profitability in firms, i.e. return on assets (ROA) and revenue/sales. The independent variables in the study are working capital components (days payable, days inventory, and days receivable) and corporate factors (CEO age, CEO tenure, board size, and company size). Panel data regression method – random effect (RE) regression model is used for the study. It is found that a significant relationship exists between profitability and accounts receivable in small and medium engineering firms in the US. A positive relationship between days receivable and profitability suggests that longer accounts receivable periods enhance firms’ profitability. It suggests that firms should ease their credit policy and follow a conservative receivable policy, wherein they lengthen the time period for accounts receivable. This study can be very useful for small manufacturing firms in the efficient working capital management decision-making process.

Keywords: Working Capital Management, Panel Data Analysis, Random Effect (RE) Regression Model, Profitability of Small Firms

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