A Survey of Working Capital Policy among Small Manufacturing Firms

Abstract

This study reports results of a nationwide survey on overall working capital policy of small manufacturing firms. The survey instrument used was a modified version of the 1980 Smith and Sell study [18] on large firms. A detailed 36-question form queried firms on their overall working capital policies as well as on the management of the components of working capital. Statistically significant measures of association between working capital policies and tools were found among many of the variables. However, many other expected relationships were not confirmed. I. IN T R O D U C T IO N Surveys indicate that a large portion of the financial m anager's time is devoted to w orking capital m anagem ent. T h is is n ot surprising in that current assets represent over 40% of the total assets of the typical m anufacturing firm [12, p. 12]. Because of the m agnitude and turnover rate of this investm ent, w orking capital policy and m anagem ent are im portant to financial m anagem ent. W orking capital m anagem ent is of particular im portance to the sm all business. W ith lim ited access to the long-term capital markets, these firms must rely more heavily o n ow ner financing, trade credit and short-term bank loans to finance their needed investm ent in cash, accounts receivable and inventory. In addition, poor financial m anagem ent is one of the major causes of failure am on g sm aller firms [1, 16]. If this failure rate cou ld be reduced, it w ou ld go a lo n g way towards im proving the innovative capacity of the econom y. It w ould also help reduce the unem ploym ent rate since new sm all businesses are one of the major sources of em ploym ent in the econom y today (though there is controversy [22] as to the m agnitude of this effect.) For w orking capital decisions, surveys to date^ on small businesses, like their counterparts o n large businesses, have focused on the m anagem ent of