Working capital management and AIM listed SME companies profitability: a mixed research method approach.

Abstract

This research was undertaken to achieve two main objectives. The first objective was to investigation whether working capital management (WCM) is associated with profitability of Alternative Investment Market (AIM) listed Small and Medium Enterprise (SME) companies. The second objective was to investigate through a questionnaire survey the WCM practices of AIM listed SMEs and their effect on profitability from the perspective of financial directors. These two objectives were met by the use of a mixed research method approach. The study employed two research methods by collecting both quantitative and qualitative data. The financial data analysis is based on the annual reports of 160 AIM listed SMEs over a six year period (960 firm years) for the period 2005 to 2010. The findings of the panel data regression analysis show that SMEs with shorter inventory holding period, shorter accounts receivable period and shorter accounts payable period are more profitable. However, no evidence was found that cash conversion cycle has any effect on profitability of AIM listed SME companies. Under the control variables the corporate governance factors including: board size, Chief Executive Officer (CEO) age, CEO tenure and directors remuneration were found to be statistically significant in explaining the profitability of AIM listed SME companies. Also, the following company specific characteristics were found to have statistically significant effect on AIM listed SME companies’ profitability: company age, company size, asset tangibility, gross working capital efficiency and working capital requirement. In terms of the WCM practices, a questionnaire analysis was used. Questionnaires were sent to 248 companies to examine the WCM practices of AIM listed SME companies from the view point of financial directors. The analysis employed both t-test and one-way Analysis of Variance (ANOVA). The findings of the t-test and one-way ANOVA analysis indicate that there are significant differences in the perception of financial directors about each component of WCM. First, there are differences in the educational level and work experience of financial directors and their attitude towards WCM. Second, there are differences in the importance attached to the effect of each component of WCM to profitability. Third, the results indicate significant differences in the way AIM listed SME companies set target level and strategy pursued for each component of WCM.