Trends in Working Capital Management and its Impact on

Firms’ Performance: An Analysis of Mauritian Small

Manufacturing Firms

Assignment

Submitted by:

Murtaza Ali

19016720-011

Submitted to:

Dr. Muhammad Usman

MBA 2 years

Strategic Finance
 Summary

This research paper was written by Keseven Padachi and published in January 2006.
According to this study, Firm is required to make a balance between liquidity and profitability in
order to get a good rate of success. Usually small firms play a big role in well being of economy.
Small firms cover a large percent of overall industry ratio. And studies show that small firms
also have high failure ratio. As these firms usually don’t manage working capital. Their focus is
on profit in short term aspect. A proper balance in liquidity and profitability is very important.
For that, working capital management should be critically done by manager. For well being of
economy, small enterprises should run smoothly. Working Capital management (WCM) is very
important for small firms. The performance of firm is highly affected by internal (workforce,
accounting skills etc) and external factors (i.e. government regulations, competition etc). Good
WCM leads to greater return. This article’s objective is to check the impact of different factors
on total assets of firm and to analyze the differences between different firms.

Working capital concerns with flow of funds in business. This is very important to run
business properly, without proper working capital it is not possible to run business for longer
period. Lack of working capital leads to extinction of business. Management of working capital
is very crucial. As if capital is stacked up, and operation cycle of business get jammed it will
adversely affect the business and might lead to closure of business. To smoothly run all
operations of business, working capital management is very important. Account payables,
account receivables, cash available all these thing should be managed in such a manner that it
ultimately leads to high return for business. Working capital is important for all level of firms,
but for small business it is more crucial because small business don’t have much funds and their
day to day operations should be run very smoothly to get better results.

This article is based on Mauritius market. in which small and medium sized firms are
studied. Data from 58 sample firms were collected for 6 years. 58 manufacturing firms were
selected from five different sectors i.e. food and beverages, leather garments, paper products,
prefabricated metal products and wood furniture. Profitability was measured in return on total
assets. The SMEs is characterized by a low fixed assets base and relied to a large extent on
accounts payable to fund its gross working capital. The Cash Conversion Cycle (CCC) is used as
a comprehensive measure of working capital. In order to account for firm’s size and the other
variables that may influence profits, sales a proxy for size, the gearing ratio, gross working
capital turnover ratio and ratio of current assets to total assets are included as control variables
in regressions. This research shows that there is a very strong relationship between profitability
and WCM, if a business is good with WCM it will lead to high returns. The need of working
capital changes with time, and small business should properly manage it. Furthermore the study
also reveals that paper industry is using very effectively WCM to improve profits.