The effect of working capital management on profitability: The case of Small Medium and Micro Enterprises in South Africa

Abstract

Working capital is vital in any business, especially in SMMEs, given that most of their assets are in the form of current assets. Management of working capital is vital in order to improve profitability of the business. This study investigated the effect working capital management on profitability, using fifteen South African SMMEs, listed on the Alt-X on the JSE, from 2008-2012, using a multiple regression analysis. The results show a positive relationship between number of days account receivable, number of day’s inventory and negative relationship between number of days payable and cash convention cycle. Thus minimizing working capital and decreasing the cash conversion cycle increases profitability and hence shareholder value.