Working capital requirements of manufacturing SMEs: evidence from emerging economy

The purpose of this paper is to analyze the effects of various factors like profitability, growth opportunity, financial leverage, assets tangibility, operating cash flows, age and size of firm on working capital requirements (WCR) of manufacturing SMEs in India.

The paper uses a panel data regression model with fixed and random effect estimations. The data utilized in this study includes financial data of 254 manufacturing SMEs operating in India for the period 2010 to 2014.

The overall results of the study indicate that operating cash flow, financial leverage, profitability, sales growth and asset tangibility are the key drivers of WCR for Indian manufacturing SMEs. Profitability of firm and sales growth are found to be positively related to WCR. In contrast, asset tangibility, operating cash flow and financial leverage are found to be negatively related to WCR.

This paper investigates firm-specific factors while ignoring external factors like GDP growth, business indicators and industry type. Further research can be done to assess the effect of these external factors on WCR.

This research contributes to the working capital literature by providing empirical evidence on determining factors of WCR in manufacturing SMEs.