The effects of working capital management on SME's profitability in Malaysia

The inefficient management of working capital not only reduces profitability but in the end may also lead a concern to financial crisis thus every organization regardless of its profit orientation, size and nature of business, needs requisite amount of working capital. Consequently, the efficient working capital management is the most crucial factor in maintaining survival, liquidity, solvency and profitability of the concerned business organization. The objective of this study is to assess the influence of working capital components on the profitability of selected small and medium enterprises (SMEs) in Malaysia. Deductive approach has been incorporated and chose positivism research philosophy. The sample sizes of 58 SMEs have been selected for gathering the financial information in the study. The Statistical Package for Social Sciences (SPSS) has been applied in the study. The relevant data has been gathered for the time frame of five years i.e. 2010 to 2014. Result shows that it is a significant relationship between the working capital management and profitability of the selected firms. Thus, these findings have been suggested to the small and medium enterprises to minimize its borrowings in order to reduce the risk in the company. Moreover, the small and medium enterprises are recommended that they should improve their receivable cycle to ensure that cash is recovered from the parties. Therefore, firms can provide the discount to the clients in order to collect their account receivables.