Empirical Study on the Influence of Working Capital Management on Performance of SMEs in a Developing Economy

Abstract

The study examined the influence of working capital management on the performance of SMEs in Ghana. Both descriptive and correlational research design was adopted for the study. The annual financial statements from 2011 to 2015 of SMEs in the Greater Accra, Ashanti and Brong Ahafo Regions of Ghana were examined. The study adopted availability/convenience sampling technique to select four hundred (400) SMEs. The impact of working capital management on the performance of SMEs in Ghana was established through the use of Ordinary Least Square (OLS) regression technique. Average Return on Capital Employed (ROCE) was proxied as the measure of performance whilst average cash conversion period, average account receivable days, average inventory turnover days and average account payable days were used as proxies for working capital management. The study found that cash conversion period, account receivable days and inventory turnover days were significantly and negatively related to performance. On the other hand, account payable days was ascertained to have a positive relation with performance. It is thus concluded that effective working capital management impacts on the performance of SMEs. The implication of these results is that by decreasing the cash conversion period, account receivable days and inventory turnover days, the SMEs can increase their profitability. The study recommends that the SMEs should consider a reduction in the cash conversion period, average account receivable days and average inventory turnover days. The SMEs must also consider negotiating for favourable terms of payments with their suppliers.