Net working capital, cash flow and performance of UK SMEs

Godfred Adjapong Afrifa

138 citations0/0 files storedReview of Accounting and Finance

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Working Capital and Financial Performance Corporate Finance and Governance Supply Chain and Inventory Management

Abstract

Purpose – This paper aims to examine the influence of cash flow on the relationship between net working capital and firm performance. Design/methodology/approach – The paper uses unbalanced panel data regression analysis on a sample of 6,926 non-financial small and medium enterprises in the UK for the period from 2004 to 2013. Findings – The results indicate a strong concave relationship between net working capital and performance in the absence of cash flow; however, the relationship becomes convex after taking cash flow into consideration. The results further show that firms with cash flow below the sample median exhibit lower investment in working capital, but firms with cash flow above the sample median have higher investment in working capital. The results suggest that managers should consider their firms cash flow when determining the appropriate investment to be made in working capital, so as to improve performance. Practical implications – Overall, the results suggest that whilst firms with limited cash flow should strive to reduce investment in working capital, firms with available cash flow should increase investment in working capital to improve performance. Originality/value – This current study incorporates the relevance of cash flow in assessing the association between working capital management and firm performance.

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References

2001Econometric Analysis of Cross Section and Panel Data 1984Corporate financing and investment decisions when firms have information that investors do not have 2021Econometric Analysis of Panel Data 1958The Cost of Capital, Corporation Finance and the Theory of Investment 2008The cost of capital, corporation finance and the theory of investment 2003Analysis of Panel Data 1988Financing Constraints and Corporate Investment 1987Financing Constraints and Corporate Investment

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