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Importance of Working Capital Management and Its Components for Firm Profitability

Author

Listed:
  • Zdeněk Toušek
  • Jana Hinke
  • Barbora Gregor
  • Martin Prokop

Abstract

The current situation of slower economic growth is leading to a more difficult access to funds and unpredictable payment behaviour of customers, which predetermines growing importance of working capital management. The aim of the present article is to examine the effects of working capital investment and its components (inventories, accounts receivable, accounts payable and cash) on the firm's performance in the case of non-cyclical and cyclical industries in the Czech Republic. The underlying dataset comprises corporate data of 293 firms from 2010 to 2018. The calculations reveal that both industries applied over the period a very similar conservative working capital management strategy consisting in increasing working capital investment accompanied by simultaneous development of all its components. The results also indicate dissimilarities in the importance of working capital components with respect to the firm's performance. Cash seems to be the most important component, contrary to inventories, which are insignificant jointly for both industries. Accounts receivable and accounts payable are significant only for cyclical industry firms.

Suggested Citation

  • Zdeněk Toušek & Jana Hinke & Barbora Gregor & Martin Prokop, 2023. "Importance of Working Capital Management and Its Components for Firm Profitability," Prague Economic Papers, Prague University of Economics and Business, vol. 2023(4), pages 367-388.
    • Handle: RePEc:prg:jnlpep:v:2023:y:2023:i:4:id:835:p:367-388
    DOI: 10.18267/j.pep.835
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    References listed on IDEAS

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    1. Muhammad Yousaf & Petr Bris & Ismat Haider & David McMillan, 2021. "Working capital management and firm’s profitability: Evidence from Czech certified firms from the EFQM excellence model," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1954318-195, January.
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    More about this item

    Keywords

    accounts payable; accounts receivable; inventory; profitability; working capital management;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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