Importance of Working Capital Management and Its Components for Firm Profitability

Zdeněk Toušek, Jana Hinke, Barbora Gregor and Martin Prokop

Prague Economic Papers, 2023, vol. 2023, issue 4, 367-388

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.

Keywords: accounts payable; accounts receivable; inventory; profitability; working capital management (search for similar items in EconPapers)
JEL-codes: L25 M21 O12 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.18267/j.pep.835

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