DOES WORKING CAPITAL MANAGEMENT ABLE TO INCREASE SUSTAINABLE GROWTH THROUGH ASSET UTILIZATION?
Keywords:
working capital management, asset utilization, sustainability growth, cash conversion cycle
Abstract
Working capital management has a strategic role to maintain a balance between liquidity and profitability so that firms have greater opportunities to operate sustainably. This study mainly aims to investigate the ability of working capital management increase sustainable growth through asset utilization. We run panel data regression on manufacturing firms listed in the Indonesian Stock Exchange for the years of 2010-2017 as our sample. By controlling for leverage, sales growth, and firm size, our empirical results demonstrate that working capital management negatively affects firms’ asset utilization. Further, the study also finds that asset utilization positively affects sustainable growth. Eventually, we empirically show that asset utilization mediates the relationship between working capital management and sustainable growth. The findings imply that if Indonesian manufacturing firms manage to have efficient working capital management, they are more likely to utilize their assets efficiently that in turn will increase their growth optimally without causing problems to their cash.
References
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Aminu, Y., & Zainudin, N. (2015). A Review of Anatomy of Working Capital Management Theories and the Relevant Linkages to Working Capital Components: A Theoretical Building Approach. European Journal of Business and ManagementOnline), 7(2), 2222–2839.
Amouzesh, N., Moeinfar, Z., & Mousavi, Z. (2011). Sustainable Growth Rate and Firm Performance : Evidence From Iran Stock Exchange. International Journal of Business and Social Science, 2(23), 249–255.
Arunkumar, O. ., & Radharamanan, T. (2013). Working Capital Management and Profitability : An Empirical Analysis of Indian Manufacturing Firms. A, 4(1), 121–129.
Ashta, A. (2008). Sustainable growth rates : refining a measure. Strategic Change, 17, 207–214. https://doi.org/10.1002/jsc.827
Attom, B. E. (2016). Working Capital Management As A Financial Strategy To Improve Profitability and Growth of Micro and Small Scale Enterprise. International Journal of Research in Commerce and Management, 7(7), 42–50.
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Churchil, N. C., & Mullins, Lj. (2001). How Fast Can Your Company Afford to Grow? Harvard Business Review, 79(5), 135–143.
Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms ? Journal of Business Finance & Accounting, 30(May), 573–588. https://doi.org/10.1111/1468-5957.00008
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Hafid, I. (2016). The effect of Margin Profit and Total Assets Towards Sustainable Growth Rate of the Distribution and Trade Company. International Business Managemen, 10(4), 423–428.
Hien Tran, Abbott, M., & Jin-Yap, C. (2017). How does working capital management affect the profitability of Vietnamese small and medium sized enterprises ? Introduction. Journal of Small Business and Enterprise Development, 24, 2–11. https://doi.org/10.1108/JSBED-05-2016-007
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Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders’ wealth. Review of Finance, 17(5), 1827–1852. https://doi.org/10.1093/rof/rfs043
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Nobanee, H., & Abraham, J. (2014). A Study of the Relationship between Net Trade Cycle and Liquidity of Small Firms. International Research Journal of Finance and EconomicsSsrn, 120, 8–12. https://doi.org/10.2139/ssrn.2970032
Padachi, K., Howorth, C., & Narasimhan, M. S. (2012). Working Capital Financing Preferences : the Case of Mauritian Manufacturing Small and. Asian Academy of Management Journal of Accounting adn Finance, 8(1), 125–157.
Panda, A. K., & Nanda, S. (2018). Panda . A . K . and Nanda S ., ( 2018 ) Working Capital Financing and Corporate , Article information :, (April).
Pedro Juan García-Teruel, P. M.-S. (2007). García-Teruel P J & Martinez-Solano P. 2007. Effects of Working Capital Management on SME Profitability. International Journal of Managerial Finance, 3(2), 164–177.
Rădăşanu, A. C. (2015). Cash-Flow Sustaible Growth Rate Models. Journal of Public Administration, Finance and Law, (7), 62–70.
Rahim, N. (2017). Sustainable Growth Rate and Firm Performance: A Case Study in Malaysia, 3(2), 48–60. https://doi.org/https://doi.org/10.18510/ijmier.2017.321
Salawu, R. O., & Alao, J. A. (2014). Determinants of Working Capital Management : Case of Nigerian Manufacturing Firms. Journal of Economics and Sus, 5(14), 49–57.
Şen, M., & Oruc, E. (2009). Working Capital Management and Return On Total Assets in ISE. International Journal of Business and Management, 4(10), 109–114.
Shapiro, A. C., & Balbirer, S. D. (2000). Modern Corporate Finance: A Multidisciplinary Approach To Value Creation. New Jersey: Prentice Hall.
Singhania, M., & Mehta, P. (2017). Working capital management and firms’ profitability: evidence from emerging Asian countries. South Asian Journal of Business Studies, 6(1), 80–97. https://doi.org/10.1108/SAJBS-09-2015-0060
Smith, K. V. (1973). State of the Art of Working Capital Management. Financial Management, 2(3), 50–55. https://doi.org/DOI: 10.2307/3664987
Tauringana, V., & Adjapong Afrifa, G. (2013). The relative importance of working capital management and its components to SMEs’ profitability. Journal of Small Business and Enterprise Development, 20(3), 453–469. https://doi.org/10.1108/JSBED-12-2011-0029
Vural, G. (2012). Affects of Working Capital Management on Firm ’ s Performance : Evidence from Turkey. International Journal of Economics and Financial Issues, 2(4), 488–495.
Wahba, H., & Elsayed, K. (2015). The mediating effect of financial performance on the relationship between social responsibility and ownership structure. Future Business Journal, 1(1–2), 1–12. https://doi.org/10.1016/j.fbj.2015.02.001
Wasiuzzaman, S. (2015). Working Capital and Profitability in Manufacturing Firms in Malaysia: An Empirical Study. Global Business Review, 16(4), 545–556. https://doi.org/10.1177/0972150915581098
Adekola, A., Samy, M., & Knight, D. (2017). Efficient working capital management as the tool for driving profitability and liquidity : a correlation analysis of Nigerian companies. International Journal Business and Globalisation, 18(2), 251–275. https://doi.org/10.1504/IJBG.2017.081957
Afrifa, G. A. (2015). Working Capital Management Practices and Profitability of AIM Listed SMEs. Journal of Enterprising Culture, 23, 1–23. https://doi.org/10.1142/S0218495815500016
Aminu, Y., & Zainudin, N. (2015). A Review of Anatomy of Working Capital Management Theories and the Relevant Linkages to Working Capital Components: A Theoretical Building Approach. European Journal of Business and ManagementOnline), 7(2), 2222–2839.
Amouzesh, N., Moeinfar, Z., & Mousavi, Z. (2011). Sustainable Growth Rate and Firm Performance : Evidence From Iran Stock Exchange. International Journal of Business and Social Science, 2(23), 249–255.
Arunkumar, O. ., & Radharamanan, T. (2013). Working Capital Management and Profitability : An Empirical Analysis of Indian Manufacturing Firms. A, 4(1), 121–129.
Ashta, A. (2008). Sustainable growth rates : refining a measure. Strategic Change, 17, 207–214. https://doi.org/10.1002/jsc.827
Attom, B. E. (2016). Working Capital Management As A Financial Strategy To Improve Profitability and Growth of Micro and Small Scale Enterprise. International Journal of Research in Commerce and Management, 7(7), 42–50.
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. https://doi.org/10.1016/j.jbusres.2013.01.016
Burns, R. (1991). A Survey of Working Capital Policy among Small Manufacturing Firms. Journal of Small Business Finance Provided, 1(1), 61–74.
Churchil, N. C., & Mullins, Lj. (2001). How Fast Can Your Company Afford to Grow? Harvard Business Review, 79(5), 135–143.
Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms ? Journal of Business Finance & Accounting, 30(May), 573–588. https://doi.org/10.1111/1468-5957.00008
Gorondutse, A. H., Abubakar, A., Ali, R. A., & Naalah, M. N. I. (2017). The Effect Of Working Capital Management on SMEs Profitability in Malaysia. Polish Journal of Management Studies, 16(2), 99–109. https://doi.org/10.17512/pjms.2017.16.2.09
Hafid, I. (2016). The effect of Margin Profit and Total Assets Towards Sustainable Growth Rate of the Distribution and Trade Company. International Business Managemen, 10(4), 423–428.
Hien Tran, Abbott, M., & Jin-Yap, C. (2017). How does working capital management affect the profitability of Vietnamese small and medium sized enterprises ? Introduction. Journal of Small Business and Enterprise Development, 24, 2–11. https://doi.org/10.1108/JSBED-05-2016-007
Higgins, R. C. (1977). How Much Growth Can a Firm Afford? Financial Management, 6(Fall), 7 16. Retrieved from https://studies2.hec.fr/jahia/webdav/.../finance a cour terme/Hggins.pdf%0A
Kester, G. W. (2002). How much growth can borrowers sustain. The RMA, (June), 49–53. Retrieved from http://www.tabf.org.tw/tw/User/RiskMt/RMA/1142.pdf
Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders’ wealth. Review of Finance, 17(5), 1827–1852. https://doi.org/10.1093/rof/rfs043
Kijewska, A. (2016). Conditions for Sustainable Growth ( Sgr ) for Companies From Metallurgy and. Metalurgija, 55(1), 139–142.
Manaf, N. B. A., Saad, N. B. M., Mohamad, N. E. A. B., Ali, I. B. M., & Rahim, N. B. (2018). Determinants of Sustainability Growth Rate (SGR) By Using Zakon’s Model To Encounter With Shariah Compliance Requirements For Shariah Securities Compliance Firms in Malaysia. International Journal of Industrial Management, 4(June), 61–69.
Mannori, E., & Mohammad, J. (2012). The Determinant of Working Capital Management of Manufacturing Companies : Case of Singapore Firms. Research Journal of Finance and Accounting, 3(11), 15–23.
Mehta, M. S. P. (2017). Working capital management and firms’ profitability: evidence from emerging Asian countries. South Asian Journal of Business Studies, 6(1), 80–97. https://doi.org/10.1108/SAJBS-09-2015-0060
Momčilović, M., Begović, S. V., Tomašević, S., & Ercegovac, D. (2015). Sustainable Growth Rate: Evidence from Agricultural and Food Enterprises. Management, 20(76), 63–75. https://doi.org/10.7595/management.fon.2015.0017
Nobanee, H., & Abraham, J. (2014). A Study of the Relationship between Net Trade Cycle and Liquidity of Small Firms. International Research Journal of Finance and EconomicsSsrn, 120, 8–12. https://doi.org/10.2139/ssrn.2970032
Padachi, K., Howorth, C., & Narasimhan, M. S. (2012). Working Capital Financing Preferences : the Case of Mauritian Manufacturing Small and. Asian Academy of Management Journal of Accounting adn Finance, 8(1), 125–157.
Panda, A. K., & Nanda, S. (2018). Panda . A . K . and Nanda S ., ( 2018 ) Working Capital Financing and Corporate , Article information :, (April).
Pedro Juan García-Teruel, P. M.-S. (2007). García-Teruel P J & Martinez-Solano P. 2007. Effects of Working Capital Management on SME Profitability. International Journal of Managerial Finance, 3(2), 164–177.
Rădăşanu, A. C. (2015). Cash-Flow Sustaible Growth Rate Models. Journal of Public Administration, Finance and Law, (7), 62–70.
Rahim, N. (2017). Sustainable Growth Rate and Firm Performance: A Case Study in Malaysia, 3(2), 48–60. https://doi.org/https://doi.org/10.18510/ijmier.2017.321
Salawu, R. O., & Alao, J. A. (2014). Determinants of Working Capital Management : Case of Nigerian Manufacturing Firms. Journal of Economics and Sus, 5(14), 49–57.
Şen, M., & Oruc, E. (2009). Working Capital Management and Return On Total Assets in ISE. International Journal of Business and Management, 4(10), 109–114.
Shapiro, A. C., & Balbirer, S. D. (2000). Modern Corporate Finance: A Multidisciplinary Approach To Value Creation. New Jersey: Prentice Hall.
Singhania, M., & Mehta, P. (2017). Working capital management and firms’ profitability: evidence from emerging Asian countries. South Asian Journal of Business Studies, 6(1), 80–97. https://doi.org/10.1108/SAJBS-09-2015-0060
Smith, K. V. (1973). State of the Art of Working Capital Management. Financial Management, 2(3), 50–55. https://doi.org/DOI: 10.2307/3664987
Tauringana, V., & Adjapong Afrifa, G. (2013). The relative importance of working capital management and its components to SMEs’ profitability. Journal of Small Business and Enterprise Development, 20(3), 453–469. https://doi.org/10.1108/JSBED-12-2011-0029
Vural, G. (2012). Affects of Working Capital Management on Firm ’ s Performance : Evidence from Turkey. International Journal of Economics and Financial Issues, 2(4), 488–495.
Wahba, H., & Elsayed, K. (2015). The mediating effect of financial performance on the relationship between social responsibility and ownership structure. Future Business Journal, 1(1–2), 1–12. https://doi.org/10.1016/j.fbj.2015.02.001
Wasiuzzaman, S. (2015). Working Capital and Profitability in Manufacturing Firms in Malaysia: An Empirical Study. Global Business Review, 16(4), 545–556. https://doi.org/10.1177/0972150915581098
Published
2020/10/14
Section
Original Scientific Paper
