Working Capital Management and Firm Profitability
Summary
Working capital management encompasses the policies and practices that firms employ to balance short-term assets and liabilities to sustain smooth operations and maximise returns. Efficient management of inventory, receivables and payables determines a firm’s liquidity, operational resilience and capacity to seize growth opportunities. A firm that minimises the cash conversion cycle without jeopardising supply chains can free up resources for investment, reduce financing costs and enhance profitability. Conversely, overly conservative approaches may restrict sales growth, while aggressive strategies can expose a business to liquidity shortfalls. The optimal configuration often varies by industry, firm size and stage of development. In an increasingly interconnected global economy, sound working capital management contributes to financial stability, enhances creditworthiness and supports sustainable value creation across diverse market conditions, from mature enterprises to high-growth ventures and small to medium-sized enterprises.
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Working Capital Management and Firm Profitability publication trend
The graph below shows the total number of articles in working capital management and firm profitability across all publications each year (not limited to Nature Index journals).
Technical terms
Working capital: Difference between a firm’s current assets and current liabilities, indicating resources available for daily operations.
Net working capital (NWC): Measure of short-term financial health calculated as current assets less current liabilities.
Cash conversion cycle (CCC): Duration between cash outlay for inputs and cash receipt from sales, comprising inventory, receivables and payables intervals.
Working capital financing: Methods by which firms fund short-term asset needs, including bank loans, trade credit and equity injections.
Working capital strategy: Approach to balancing liquidity and profitability, often characterised as conservative (high liquidity) or aggressive (lower liquidity).
References
- The Interplay between Working Capital Management and a Firm’s Financial Performance across the Corporate Life Cycle. Sustainability (2020).
- Is profitability driven by working capital management? Evidence for high-growth firms from emerging Europe. Journal of Business Economics and Management (2017).
- Does the efficiency of working capital management and environmental, social, and governance performance affect a firm’s value? Evidence from the United States. Financial Markets Institutions and Risks (2022).
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