The Impact of Working Capital Management on Profitability of Croatian Software Companies

Open access

Abstract

The idea that working capital management impacts profitability and risk of a company is generally accepted and in last 10-15 years has acquired a substantial interest. Accordingly, from the aspect of the measure of efficiency of working capital management, the objective of this paper is to evaluate working capital management impact on profitability of Croatian software companies. This impact was examined using descriptive and correlation as well as panel regression analysis for six-year period (2008-2013). The results show that after controlling for characteristics of the company and macroeconomic conditions working capital management significantly affects the profitability of Croatian software firms. Moreover, the results imply the existence of a nonlinear, concave quadratic relationship between the net working capital and return on assets. This suggest the existence of an optimal level of net working capital that balances costs and benefits and maximizes profitability of analysed companies.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Afrifa G. A. (2015). Net Working Capital Cash Flow and Performance of UK SMEs. Cash Flow and Performance of UK SMEs (January 14 2015).

  • Afza T. & Nazir M. S. (2008). Working Capital Approaches and Firm’s Returns in Pakistan. Social Sciences 1 25-36.

  • Ahmad N. Nadeem M. & Hamad N. (2014). Impact of working capital on corporate performance A case study from cement chemical and engineering sectors in Pakistan. Arabian Journal of Business and Management Review 3(7) 12-23.

  • Akoto R. K. Awunyo-Vitor D. & Angmor P. L. (2013). Working capital management and profitability: Evidence from Ghanaian listed manufacturing firms. Journal of Economics and International Finance 5(9) 373-379.

  • Angahar P. A. & Alematu A. (2014). Impact of working capital on the profitability of the Nigerian cement industry. European Journal of Accounting Auditing and Finance Research 2(7) 17-30.

  • Ani W. U. Okwo I. M. & Ugwunta D. O. (2012). Effects of Working Capital Management on Profitability: Evidence from the Topfive Beer Brewery Firms in the World. Asian Economic and Financial Review 2(8) 966-982.

  • Appuhami B. A. R. (2008). The Impact of Firms’ Capital Expenditure On Working Capital Management: An Empirical Study Across Industries in Thailand. International Management Review 4(1) 1-10.

  • Archavli E. Siriopoulos K. & Arvanitis S. (2012). Determinants of working capital management. Dohvaćeno Iz SSRN 2179907. http://doi.org/10.2139/ssrn.2179907

  • Baños-Caballero S. García-Teruel P. J. & Martínez-Solano P. (2012a). How does working capital management affect the profitability of Spanish SMEs? Small Business Economics 39(2) 517-529. http://doi.org/10.1007/s11187-011-9317-8

  • Baños-Caballero S. García-Teruel P. J. & Martínez-Solano P. (2012b). Working capital requirement financing and Spanish SMEs performance. Fundación de Estudios Financieros.

  • Baños-Caballero S. García-Teruel P. J. & Martínez-Solano P. (2014). Working capital management corporate performance and financial constraints. Journal of Business Research 67(3) 332-338. Retrieved from http://www.sciencedirect.com/science/article/pii/S0148296313000180

  • Bhunia A. & Das A. (2012). Affiliation between Working Capital Management and Profitability. Interdisciplinary Journal of Contemporary Research in Business 3(9) 957-968.

  • Brealey R. A. Myers S. C. & Allen F. (2011). Principles of Corporate Finance (10th ed.). New York: McGraw-Hill/Irwin.

  • Brealey R. A. Myers S. C. & Marcus A. J. (2001). Fundamentals of Corporate Finance (3rd ed.). Boston MA: McGraw-Hill Higher Education divison of the McGraw-Hill Companies Inc.

  • Brigham E. F. & Daves P. R. (2007). Intermediate financial management (9th ed. Vol. 21). South- Western Thomson Corporation. http://doi.org/10.1016/0890-8389(89)90100-5

  • Charitou M. Lois P. & Santoso H. B. (2012). The Relationship Between Working Capital Management and Firm’s profitability: A Empirical Investigation For An Emerging Asian Country. International Business and Economics Research Journal 11(8) 839-849.

  • Chiou J.-R. Cheng L. & Wu H.-W. (2006). The Determinants of Working Capital Management. The Journal of American Academy of Business 10(1) 149-156. Retrieved from http://www.mendeley.com/research/determinants-working-capital-management/

  • Deloof M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance and Accounting 30(3-4) 573-587. http://doi.org/10.1111/1468-5957.00008

  • Dinku T. (2013). Impact of Working Capital Management on Profitability of Micro and Small Enterprises in Ethiopia : The Case of Bahir Dar City Administration. International Journal of Accounting and Taxation 1(1) 15-24. http://doi.org/10.15640/ijat

  • Eljelly A. M. A. (2004). Liquidity - profitability tradeoff: An empirical investigation in an emerging market. International Journal of Commerce and Management 14(2) 48-61.

  • Enqvist J. Graham M. & Nikkinen J. (2012). The Impact of Working Capital Management on Firm Profitability in Different Business Cycles: Evidence From Finland the Impact of Working Capital Management on Firm Profitability in Different Business Cycles: Evidence From Finland. International Business and Finance 32(August) 36-49. http://doi.org/doi:

    • Crossref
    • Export Citation
  • Ganesan V. (2007). An analysis of working capital management efficiency in telecommunication equipment industry. Rivier Academic Journal 3(2) 1-10. Retrieved from http://www.rivier.edu/journal/ROAJ-Fall-2007/J119-Ganesan.pdf

  • García-Teruel P. J. & Martínez-Solano P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance 3(2) 164-177. http://doi.org/10.1108/17439130710738718

  • Gill A. Biger N. Mathur N. Palmer S. Street W. H. & Vb-k B. C. (2010). The Relationship Between Working Capital Management And Profitability: Evidence From The United States. Business and Economics Journal 2010 1-9.

  • Gomes D. F. N. (2013). How does Working Capital Management affect Firms´ Profitability? - Evidence from Portugal. School of Economics & Management Lisboa. Retrieved from Masther thesis

  • Jose M. L. Lancaster C. & Stevens J. L. (1996). Corporate Return and Cash Conversion Cycle. Journal of Economics and Finance 20(1) 33-46.

  • Karadagli E. C. (2012). The Effect of Working Capital Management on the Profitability of Turkish SMEs. British Jorunal Od Economics Finance and Management Sciences 5(2) 36-44.

  • Kieschnick R. Laplante M. & Moussawi R. (2013). Working Capital Management and Shareholders’ Wealth. Review of Finance 17(5) 1827-1852. http://doi.org/10.1093/rof/rfs043

  • Kim J. H. & Chung K. H. (1990). An integrated evaluat ion of investment in inventory a nd credit: a cash flow approach. Journal of Business Finance and Accounting 17(3) 381-390.

  • Koralun-Bereźnicka J. (2014). On the Relative Importance of Corporate Working Capital Determinants : Findings from the EU Countries. Contemporary Economics 8(4) 415-434. http://doi.org/10.5709/ce.1897-9254.154

  • Kwenda F. & Holden M. (2014). Determinants of Working Capital Investment in South Africa: Evidence from Selected JSE- Listed Firms. Journal of Economics and Behavioral Studies 6(7) 569-580.

  • Lazaridis I. & Tryfonidis D. (2006). Relationship Between Working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Financial Management & Analysis 19(1) 26-35.

  • Mathuva D. M. (2010). The Influence of Working Capital Management Components on Corporate Profitability: A Survey on Kenyan Listed Firms. Research Journal of Business Management. http://doi.org/10.3923/rjbm.2010.1.11

  • Mohamad N. E. A. B. & Saad N. B. M. (2010). Working Capital Management: The Effect of Market Valuation and Profitability in Malaysia. International Hournal of Business and Management 5(11) 140-147.

  • Moyer R. C. McGuigan J. R. & Kretlow W. J. (2006). Contemporary Financial Management (10th ed.). Mason OH: South-Western Thomson Corporation.

  • Muscettola M. (2014). Cash Conversion Cycle and Firm´s Profitability: An Empirical Analysis on a Sample of 4.226 Manufacturing SMEs of Italy. International Journal of Business and Management 9(5) 25-35. http://doi.org/10.5539/ijbm.v9n5p25

  • Nazir M. S. & Afza T. (2009). Impact of Aggressive Working Capital Management Policy on Firms ’ Profitability. Journal of Applied Finance 15(8) 19-31. http://doi.org/10.5897/AJBM11.326

  • Nobanee H. (2009). Working Capital Management and Firm’s Profitability: An Optimal Cash Conversion Cycle. Dohvaćeno Iz SSRN 147123. http://doi.org/10.2139/ssrn.1471230

  • Nobanee H. & AlHajjar M. (2009). A Note on Working Capital Management and Corporate Profitability of Japanese Firms. Electronic Copy Available at: Http://ssrn.Com/abstract 1433243. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1433243

  • Nwankwo O. & Osho G. (2010a). An empirical analysis of corporate survival and growth: Evidence from efficient working capital management. International Journal of Scholarly … 12(1) 1-13. Retrieved from http://www.nationalforum.com/Electronic Journal Volumes/Nwankwo Odi - An Empirical Analysis of Corporate Survival and Growth IJSAID V12 N1 2010.pdf

  • Nwankwo O. & Osho G. S. (2010b). An empirical analysis of corporate survival and growth: Evidence from efficient working capital management. International Journal of Scholarly Academic Intellectual Diversity 12(1) 1-13. Retrieved from http://www.nationalforum.com/ Electronic Journal Volumes/Nwankwo Odi - An Empirical Analysis of Corporate Survival and Growth IJSAID V12 N1 2010.pdf

  • Opler T. Pinkowitz L. Stulz R. & Williamson R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics 52(1) 3-46.

  • Orsag S. (2003). Vrijednosni papiri. (M. Ivanišević Ed.). Sarajevo: Revicon.

  • Pais M. A. & Gama P. M. (2015). Working capital management and SMEs profitability : Portuguese evidence. International Journal of Managerial Finance 11(3) 341-358. http://doi.org/10.1108/IJMF-11-2014-0170

  • Peel M. J. & Wilson N. (1996). International Small Business Journal. International Small Business Journal 14(2) 52-68. http://doi.org/10.1177/0266242696142004

  • Quayyum S. T. (2012). Relationship between Working Capital Management and Profitability in Context of Manufacturing Industries in Bangladesh. International Journal of Business and Management 7(1) 58-70. http://doi.org/10.5539/ijbm.v7n1p58

  • Raheman A. & Nasr M. (2007). Working Capital Management And Profitability - Case Of Pakistani Firms 3(1) 279-300.

  • Republika Hrvatska M. G. (2014). Industrijska strategija Republike Hrvatske 2014. - 2020. Zagreb.

  • Richards V. D. & Laughlin E. J. (1980). A Cash Conversion Cycle Approach to Liquidity Analysis. Financial Management (1972). Spring80 9(1) 32-38. http://doi.org/10.2307/3665310

  • Șen M. & Oruç E. (2009). Relationship between Efficiency Level of Working Capital Management and Return on Total Assets in Ise. International Journal of Business and Management 4(10) 109-114.

  • Shin H. & Soenen L. (1998). Efficiency of working capital management and corporate profitability. Financial Practice and Education 8(2) 37-45.

  • Silva S. M. S. F. N. (2011). Effects of working capital management on the profitability of Portuguese manufacturing firms. Universidade do Minho Braga.

  • Singhania M. Sharma N. & Rohit J. Y. (2014). Working capital management and profitability: evidence from Indian manufacturing companies. Decision 41(3) 313-326. http://doi.org/10.1007/s40622-014-0043-3

  • Smith K. (1980). Profitability versus Liquidity Tradeoffs in working capital management. Readings on the Management of Working Capital 549-562.

  • Tahir M. & Anuar M. B. A. (2015). The determinants of working capital management and firms performance of textile sector in pakistan. Quality & Quantity 1-14. http://doi.org/10.1007/s11135-015-0166-4

  • Uyar A. (2009). The Relationship of Cash Conversion Cycle with Firm Size and Profitability : An Empirical Investigation in Turkey. International Research Journal of Finance and Economics 24(24) 187-193.

  • Valipour H. Shooshtarian Z. & Ostovari E. (2012). Relationship between Working Capital Operating Cash Flows and Operating Income: Empirical Evidences from Listed Firms in Tehran Stock Exchange. Asian Economic and Financial Review 2(1) 20-29.

  • Van Horne J. C. & Wachowicz J. M. (2008). Fundamentals of Financial Management (13th editi). Harlow: Prentice Hall Inc.

  • Vural G. Sökmen A. G. & Çetenak E. H. (2012). Affects of Working Capital Management on Firm ’ s Performance : Evidence from Turkey. International Journal of Economics and Financial Issues 2(4) 488-495. Retrieved from www.econjournals.com

  • Zariyawati M. A. Annuar M. N. Taufiq H. & Rahim A. S. A. (2009). Working capital management and corporate performance: Case of Malaysia. Journal of Modern Accounting and Auditing 5(11) 47-54.

Search
Journal information
Cited By
Metrics
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 1476 620 93
PDF Downloads 1335 764 274