The Effect of Profitability as a Mediator in the Relationship between Working Capital Management and the Sustainable Growth of Small and Medium-Sized Enterprises in Selected Western Balkan Countries

Ardi Ahmeti and Alban Elshani

Economic Studies journal, 2024, issue 7, 47-61

Abstract: The purpose of this study is to examine the relationship between working capital management and the sustainable growth rate, using profitability as a mediator. The research analyzes a dataset comprising 122 SMEs that operated within selected Western Balkan countries from 2013 to 2022. By employing ordinary least squares regression models, the study displays an indirect connection between working capital management and the sustainable growth rate, facilitated through the mediation of profitability. The outcomes of the mediation effect analysis classify "indirect-only mediators" as the net profit margin. The findings underscore SMEs' importance in tactically managing their working capital, particularly by shortening their inventory turnover and cash conversion periods. A more efficient inventory turnover period and cash conversion period can substantially increase the SMEs' capacity to generate profits, as it enables them to generate more internal funds. This internal financing is crucial for achieving a sustainable growth rate. Maintaining a sustainable growth rate is critical for SMEs to successfully manage, control, and strategize their financial operations and activities. A constant growth rate has the potential to boost profitability and provide significant information to management for prudent financial decision-making. The results of this study can be used in future research attempts to analyze many aspects of the sustainable growth rate. This goes beyond individual activities and embraces the entire industry, to understand how SMEs can improve the efficiency of their financial operations and strategic initiatives, thereby contributing to their overall success.

JEL-codes: F43 N60 O47 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:bas:econst:y:2024:i:7:p:47-61

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