The relationship between working capital management and profitability of SMEs in China

Abstract

This objective of this paper is to examine how working capital management affect Chinese listed SMEs' profitability. This research uses 358 listed Chinese SMEs as samples, and the sample period covers from 2009 to 2018. We employ multiple proxies to measure the efficiency of working capital management (WCM), including receivable collection period (RCP), payable deferral period (PDP), inventory conversion period (ICP), and cash conversion cycle (CCC). Based on the descriptive and quantitative analysis used, this research finds a significant negative relationship is existing between the components of WCM, like RCP, ICP and CCC, and companies' profitability. Thus, it is important for managers to consider proper working capital management as part of companies' strategy so that the firm's market value and profitability can increase.