Determinants of Working Capital Requirements: Evidence from the MSME Sector

Abstract

The wheels of every business keep rolling with the fuel of working capital. Working capital facilitates the smooth operations of businesses, contributes towards revenue generation and helps in efficient asset utilisation. In this context, the current study examines the determinants of working capital in Indian micro, small, and medium enterprises (MSME), given the dearth of literature in an Indian context. The analysis was done using financial data for a long period of 13 years, from 2006–07 to 2018–19. Firm size, asset tangibility, leverage, profitability and sales growth were taken as determining variables. Stepwise regression was applied by taking the net working capital to total assets ratio and the cash conversion cycle as proxies for working capital requirements (WCRs). The results revealed that firm size and leverage are significant determinants of working capital for chemical firms in the Indian MSME industry. This study has implications for the managers of chemical MSMEs to forecast their WCR efficiently as per the determinants identified in the study.

Keywords: Working Capital Determinants, Working Capital Requirement, MSME, Cash Conversion Cycle

View PDF