Linking Working Capital Policy Towards Financial Performance of Small Medium Enterprise (SME) in Malaysia

Abstract

Despite the fact that working capital management (WCM) is vital to businesses of any size that operated in developed and emerging countries, WCM is of particular importance to the small business firms operating in emerging markets. The importance of WCM to small and medium-sized enterprises (SMEs) stems from the limited financial resources available and heavily reliance of SMEs on WCM as a main source of finance. This study aims to provide empirical evidence on the effects of working capital investment policy on firm’s financial performance for a sample of 103 small and medium-sized firms listed with the SME Corporation of Malaysia. Data for the period from 2008 to 2013 are analysed to examine if investment policy improves firms’ return on total asset. By using correlation and pooled ordinary least square regression, the result provides a significant relationship between the level of aggressiveness of investment policy and SME’s financial performance. The findings of this study not only contribute to the scant WCM literature in Malaysia but throw light on the importance of efficient WCM to the policy makers and regulators in motivating and encouraging relevant parties to pay more attention on working capital through improving investors’ awareness and improving transparency.