A Study of the Effects of Working Capital Management on SME’s Financial Performance: A Case of Zam Manufacturing Limited

Abstract

In Zambia, Small Medium Enterprises represent 97% of all businesses, contributes 70% of the country’s Gross Domestic Product and employs 88% of the country’s workforce (FSDZ, 2021). In-spite of this, most small medium enterprises are victims of acute business failure attributed to inadequate managerial acumen, restricted technical skills, limited access to capital and poor internal financial management. The aim of the study was to investigate the relationship between working capital management and small medium enterprises’ financial performance. Cash conversion cycle was used as a comprehensive measure of working capital, which was further broken down to accounts collection period, inventory conversion period and accounts payable period was adopted as independent variables while gross operating profit was used as the dependent variable. Multiple regression analysis was applied to elucidate the relationship between working capital management and firm financial performance. The results revealed that accounts collection period and accounts payable period had a negative relationship with gross operating profit. While inventory conversion period showed a positive relationship with gross operating profit. Based on the regression analysis results, it was recommended that Zam Manufacturing Limited adopts 85% cash sales and 15% credit sales of its total sales target. Furthermore, departmental managers must undergo regular training in aspect of working capital under their responsibility to improve capacity. Additionally, the company should regulate the risk of overtrading by gradually monitoring and controlling growth.