The Relations between Working Capital Management and Profitability of Small and Medium Firms

In this paper, we study empirically the relations between working capital management and profitability of small and medium firms listed on Korea Securities Market and Kosdaq Market. The main results of this study can be summarized as follows. We find that there are statistical significant relationships between each components of working capital management(accounts payable, inventory, accounts receivable, cash cycle, operating cycle) and profitability of small and medium firms. The lengthening the number of days accounts payable improve the small and medium firms' profitability, and the shortening the number of days of inventory, number of days accounts receivable, cash cycle and operating cycle improve the small and medium firms' profitability. Although controling the endogeneity problems, there are statistical significant relationships between each components of working capital management and profitability of small and medium firms. That is, the lengthening the number of days accounts payable improve the small and medium firms' profitability, and the shortening the number of days of inventory and number of days accounts receivable improve the small and medium firms' profitability. So to speak, the shortening operating cycle combined the number of days of inventory and the number of days accounts receivable improve the small and medium firms' profitability. Moreover, when market level of firms are accounted for, working capital management of small and medium firms listed on Kosdaq Market are more important than small and medium firms listed on Korea Securities Market. Conclusively, working capital management may be recognized as a new factor which has the significant effects on profitability of Korea small and medium firms. This evidence is consistent with Deloof's(2003) findings. Therefore, managers can create profits for their firms by handling correctly the cash cycle, the operating cycle, and by keeping each components of working capital management to an optimum level.