Qualitative Research in Financial Markets

Working capital management: a literature review and research agenda

Harsh Pratap Singh Satish Kumar

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Working capital management:

a literature review and
research agenda
Harsh Pratap Singh and Satish Kumar

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Department of Management Studies,

Malaviya National Institute of Technology, Jaipur, India

Working capital
management

173
Received 5 April 2013
Accepted 17 May 2013

Abstract
Purpose The purpose of this paper is to review research on working capital management (WCM) and
to identify gaps in the current body of knowledge, which justify future research directions. WCM has
attracted serious research attention in the recent past, especially after the financial crisis of 2008.
Design/methodology/approach Using systematic literature review (SLR) method, the present
study reviews 126 articles from referred journal and international conferences published on WCM.
Findings Detailed content analysis reveals that most of the research work is empirical and focuses
mainly on two aspects, impact of working capital on profitability of firm and working capital practices.
Major research work has concluded that WCM is essential for corporate profitability. The major issues
with prior literature are lack of survey-based approach and lack of systematic theory development
study, which opens all new areas for future research. The future research directions proposed in this
paper may help develop a greater understanding of determinants and practices of WCM.
Practical implications Till date, literature on classification of WCM has been almost non-existent.
This paper reviews a large number of articles on WCM and provides a classification scheme in to
various categories. Subsequently, various emerging trends in the field of WCM are identified to help
researchers specifying gaps in the literature and direct research efforts.
Originality/value This paper contains a comprehensive listing of publications on the WCM and
their classification according to various attributes. The paper will be useful to researchers, finance
professionals and others concerned with WCM to understand the importance of WCM. To the best of the
authors knowledge, no detailed SLR on this topic has previously been published in academic journals.
Keywords Literature review, Survey methods, Operating cycle, Working capital management
Paper type Literature review

1. Introduction
Over the last 40 years, major theoretical developments have occurred in the areas of
long-term investment and financial decision-making. Many of these new concepts and
related techniques are now being employed successfully in industrial practice. In
contrast, far less attention has been paid to the area of short-term finance, in particular
that of working capital management (WCM). Such neglect might be acceptable because
of working capital considerations of relatively little importance to the firm. Due to this
reason, only peripheral research interest in studying WCM process has been shown in
the literature. This may occur for several other reasons, first, because decisions dealing
with working capital occur frequently, and they are routine in nature. Thus, their
individual impact is insignificant. Second, unlike decisions related to capital investment,
these routine decisions are reversible over time. However, due to significant decline of
corporate performance during and after financial crisis of 2008, once again, interest of

Qualitative Research in Financial

Markets
Vol. 6 No. 2, 2014
pp. 173-197
Emerald Group Publishing Limited
1755-4179
DOI 10.1108/QRFM-04-2013-0010

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174

managers and researchers is attracted to WCM. Many research studies like Deloof
(2003), Falope and Ajilore (2009) and Gill et al. (2010) have shown that WCM also affect
the profitability of a firm to a great extent. Wang (2002) noted that aggressive liquidity
management enhances operating performance and is usually associated with higher
corporate values.
Researchers were curious about a literature review of the topic which gave basis for
this paper. This paper studies literature published on WCM. There is no literature
review of WCM published after Gentry (1988) and Viskari et al. (2011). Gentry (1988)
presented his review in 1988, but the major publication activities on WCM occurred on
and after the financial slow down of 2008, and Viskari et al. (2011) in their review used
a small sample of 23 firms. Except these two studies, there is complete dearth of
literature on WCM. The purpose of this study is to provide an extensive literature review
on WCM. More specifically, the objectives of the study are to:
synthesize the existing literature on WCM;
arrange the publication in an orderly manner to enable easy and quick search;
classify WCM research articles according their approach and methodologies; and
explore the issues in WCM research and suggest a research agenda for future
work.
In addition to the aforementioned objectives, we have focused on the following research
questions:
How articles on WCM are placed in time?
What has been studied about WCM?
What research methods have been used?
What are the most important articles about the topic?
However, it is not the intention, here, to provide any detailed summary of WCM
practices. Readers are suggested to look into the cited literature, for example, Lind et al.
(2012), to study about international WCM practices of Fortune 200 companies. The
remainder of the paper is organized as follows. We first introduced the concept of
working capital and research methodology. Second, we provided articles classification
scheme. Thereafter, an overview of the selected publications is provided. Finally, we
outlined our main findings, discussed implications and suggested avenues for future
research.
2. Concept of WCM
WCM is primarily related with all management decisions that influence the size and
effectiveness of the working capital (Kaur, 2010). The management of working capital is
important to the financial health of small and big businesses. The amount invested in
working capital is often high in proportion to the total assets employed, so it is vital to
ensure their effective utilization (Padachi, 2006). Working capital may be regarded as
the balance between current assets and current liabilities (Pass and Pike, 1984). Working
capital is customarily divided into two categories: gross working capital and net
working capital. Gross working capital is the sum total of all current assets, while net
working capital is the difference between current assets and current liabilities. The main

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components of working capital are the current assets and current liabilities (Pass and
Pike, 1987).
Current assets include:
stock or inventory (raw materials work-in-progress finished goods awaiting
sale and delivery);
debtors (unpaid bills for which the profit has already been realized in the
accounts);
trade credit (from suppliers);
cash in-hand; and
short-term securities.

Working capital
management

175

Current liabilities include:

payment due to trade creditors (mainly for raw materials and other supplies);
bank overdrafts;
other short-term loans; and
outstanding tax, dividend and interest obligations.
Working capital requirements are linked to the processes of earning and spending (Pass
and Pike 1987). This process implies an operating cycle of activities which is represented
in Figure 1. As evident from the figure, there is a continuous flow of cash to suppliers
and creditors, on the one hand, and from customers and debtors, on the other. This
suggests that main task of WCM is the matching of current asset and current liability
movements over time.
2.1 Measures of WCM
The cash conversion cycle (CCC) is used as a popular measure of WCM used in many
studies like Deloof (2003), Raheman and Nasr (2007) and Garca-Teruel and Solano
(2007) for measuring the effect of WCM on profitability of firm. CCC is the time

Labour

Overhead

Finished goods

Material

Cash

Working capital requirement

Debtors

Figure 1.
Working capital cycle

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176

difference between purchase of raw materials and getting finished goods paid. Longer
this cycle means more investment in working capital. Reducing CCC to a reasonable
minimum, generally, leads to improved profitability (Karaduman et al., 2011; Jose et al.,
1996):
CCC number of days inventories number of days accounts receivable
number of days accounts payable

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3. Methodology of literature review

As advocated by Fink (2005), a literature review must use methodology which is
systematic in approach, explicit in describing the procedures by which it was
conducted and comprehensive in its scope of including all relevant material related
to particular phenomena. Following Tranfield et al. (2003), we have used systematic
literature review (SLR) methodology in this paper. The adapted review process for
identifying the issues and future avenues in WCM research is categorized in four
phases, as shown in Figure 2.
3.1 Literature collection and boundary identification
In this paper, we have conducted a search for published journal articles on WCM in
many databases to cover a comprehensive and diverse range of articles for review. We
used the following databases: EBSCO, Elsevier Science direct, Emerald and Sciverse
Scopus for searching articles. We started with a keyword search and then delimited the
literature thereafter. Thus, it is a combination of deductive and inductive approaches
(Shukla and Jharkharia, 2013). Initially, a huge amount of literature was found by key
word search. Because it was not possible to review all found literature, we have
developed some delimiting boundaries for screening the literature. These boundaries
were given as:
papers published only in peer-reviewed academic journals were considered;
papers were collected for 32 years (1980-2012); and
papers with full-text available were considered.
Article which satisfied all listed delimiting conditions was included in the sample for
further screening. For compiling the article sample, a literature search was carried
Step-1

Figure 2.
Comprehensive
methodology for
systematic review

Data identification and article selection

Step-2

Description and classification of literature

Step-3

Detailed content and citation analysis of articles

Step-4

Reporting of findings and research gaps

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out in selected database, based on the keywords Working Capital Management to

be found in title, keywords or abstract. Initially, the database search with delimiting
boundaries resulted in 527 articles. Subsequently, different processing steps were
needed to ensure that identified papers really deal with the topic in question, i.e.
WCM. This was done by reading the papers and thereby giving reflection on their
appropriateness for the issues studied. After detailed study, 117 articles were found
directly related with WCM. However, 25 articles, presented in more than one
database, were eliminated and, thus, 92 articles qualified for final review. Our
protocol for database search is illustrated in Table I. Fink (2005) advocated that a
literature review must be comprehensive in its scope of including all relevant
material, so, finally, selected 92 articles from database were, subsequently, checked
for references. Further, 34 additional articles were found relevant to the study and
were included in the final sample of 126 articles for review. Summary of systematic
process of article selection is presented in Figure 3.

Database

Scope

Date of
search

Elsevier

Title/abstract/key
words
Title/abstract/key
words
Title/abstract/key
words
Title/abstract/key
words

18 January
2013
18 January
2013
18 January
2013
18 January
2013

Emerald
EBSCO
Scopus

Level-1
(Database search with key
words)

177

Total number
of selected
articles

Time horizon

Total number
of articles

1980-2012

83

1980-2012

86

1980-2012

165

80

1980-2012

193

24

527

117

Total

Working capital
management

Table I.
Database search protocol

Provided 527 articles

Excluded 410 articles

Level-2
(Detailed study for relevancy)

Provided 117 articles

Excluded 25articles

Level-3
(Elimination of duplicity)

Provided 92 articles

Included 34 articles

Level-4
(Scanning reference)

Provided final sample of

126 articles

Figure 3.
Summary of articles
selection process

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178

4. Description and classification of literature

One-hundred and twenty six articles identified through the SLR are analyzed in this section
with respect to the publication year, methodology used, journal of publication and sector
studied. It is done to understand the trends and issues in the literature relevant to WCM.
4.1 Analysis by year of publication
The analysis by year of publication confirms that the selected articles were published
quite regularly from 2007 to 2012. In the bar chart presented in Figure 4, there appear a
scarce number of publications in the 1980s and 1990s. Figure also confirms an upward
trend in the number of publications, 2007 onward. This could be attributed due to recent
economical slow down which highlighted the importance of WCM for maintaining
liquidity. Most of the research articles published are concentrated in 2011 and 2012. As
evident from Figure 4, maximum of 37 articles were published in the year 2012
4.2 Analysis by research methods and settings
Table II shows the frequencies with which different methodologies were used in the studies
reviewed. The methodology applied means the type of paper, whether it is based on
empirical work or primary survey. The published articles can be broadly classified into three
categories. These include empirical, survey and conceptual work on WCM. The analysis
presented in Table II shows that empirical work has been the most popular main
methodology used in the studies analyzed (85.71 per cent), with an emphasis on the
regression and correlation analysis. On the other hand, only seven studies are based on
primary survey; this can be due to difficulty in getting responses from corporate financial
managers.
4.3 Analysis by journal of publication
The analysis by journal aims to identify the journals most involved in the conversation of
literature about WCM. In total, 88 journals contained the selected publications. Figure 5
presents those with more than one articles published on the WCM. A long list of journals

Figure 4.
Articles by year of
publication

Research methods
Table II.
Articles by research
methods

Empirical
Conceptual
Survey
Total

Number

(%)

108
11
7
126

85.71
8.73
5.56
100

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179

Figure 5.
Articles by journal of
publication

with only one article was omitted for practical reasons. Figure 5 also shows that there
are 17 such journals which provide more than one article. International Research Journal
of Finance and Economics provides maximum of nine articles, followed by
Interdisciplinary journal of contemporary research in Business with seven articles
published on WCM during 1980-2012.
4.4 Articles by industry studied
Findings of the articles by industry studied indicate that WCM research is not restricted to
any particular industry. A wide range of sectors has been researched in the selected articles,
including primary industries like manufacturing, cement and textile. The majority of articles
studied multi-industry samples which indicate an attempt to compare outcomes and
findings across industries. Table III indicates the frequency of articles for each industry from
which data are collected and analyzed in a particular study. Multi-industry studies top the
table with 67 articles followed by manufacturing, textile and cement industries with 19, 6
and 4 articles published on WCM during 1980-2012.
4.5 Analysis by country studied
The analysis, by country, illustrates a wide range of experiences from the literature on
WCM. Table IV reports the countries chosen for selection of sample by the selected

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180

Table III.
Articles by industry of
sample data

Industry
Multi-sectors
Manufacturing
Textile
Cement
Pharmaceutical
Automotive
Food sector
Consumer electronics
Construction
Telecom
Petroleum
chemical
FMCG
Retail
Steel
Not mentioned
Total

Country

Table IV.
Articles by country
studied

Pakistan
India
Iran
Turkey
Nigeria
Jordan
United States
United Kingdom
Malaysia
Kenya
Multi-country
Others
Not mentioned
Total

Number of articles

(%)

67
19
6
4
3
2
2
1
1
1
1
1
1
1
1
15
126

53.17
15.04
4.76
3.17
2.38
1.58
1.58
0.791
0.79
0.79
0.79
0.79
0.79
0.79
0.79
12
100

Number of articles

(%)

20
18
10
9
7
6
3
3
3
3
6
24
13
126

15.87
14.28
7.93
7.14
5.55
4.76
2.38
2.38
2.38
2.38
4.76
19.04
11.15
100

articles for the research. WCM research seems very popular in central Asia due to the
fact that many researchers selected companies of central Asian countries like India,
Pakistan and Iran for the sample of their research study. Researchers mainly focus on a
single country setting for their study. A little number of articles report on cross-country
settings which indicate lack of systematic literature to compare findings across different
contexts and cultures. List of countries with three or more research articles is presented
in Table IV. In addition to the country-wise classification, we have distributed the
selected published articles on the basis of development of economy, firm size and
research methods. Detailed classification is presented in Table V. Based on the level of
economic development; countries are classified as developed and developing. Developed
countries include the USA and Western European nations, and developing countries

0
2

Statistical analysis
and practices

2
9

Statistical analysis
and profitability

Note: Research methods and topics

Firms
Small- and
medium-sized
Large or all sizes

Developed economies

Survey and
practices

2
6

Other

0
2

Type of economy

5
62
Statistical
analysis
and
profitability

Statistical analysis
and practices

2
14

0
2

Other

1
1

Survey and
practices

Developing economies

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Working capital
management

181

Table V.
Distribution of articles by
type of economy, firm size
and research methods

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182

include Brazil, India and Pakistan. Figure 6 shows the distribution of the number of
published papers by developed and developing countries. It indicates that during the
past few years, researchers on WCM have focused much attention on developing
countries.
5. Citation analysis
Citations means that someone has referenced work of other author(s). The citation
analysis means studying cited references of a population of articles to find the most
influential works in the field. In this section, we examined the cited references of the
WCM articles to observe the quality of the articles and to find out the most important
articles of the research stream. We have used the citation information provided by
Google Scholar for the purpose of citation analysis. It has found that only 72 of the 126
articles were cited. One possible reason can be that most of the articles were recently
published during the period of 2011 and 2012. The 126 articles have 2,016 cited
references. Average reference number was 16 per article. The most-cited articles with at
least 10 citations are shown in the Table VI. Deloof (2003) is the most-cited article with
304 citations. Shin and Soenen (1998), Lazaridis and Tryfonidis (2006), Garca-Teruel
and Martnez-Solano (2007), Raheman and Nasr (2007) and Padachi (2006) were also
among the top five most-cited publications on WCM. Table VII present the most
referenced journals publishing work on WCM. Journal of Business Finance and
Accounting is most popular due to the article of Deloof (2003). International Review of
Business Research Papers with two articles has 193 citations.
6. Content analysis
Content analysis is a class of methods within social science that can be applied both in
quantitative and qualitative ways. In the detailed content analysis of selected articles, it
was found that most of the working capital research was concentrated on two main
aspects, impact of WCM on firms profitability and WCM practices. Various other issues
studied on WCM include impact of company characteristics and WCM and impact of
payment system in WCM. These articles were placed in other category. We have also
classified the research articles into method group, empirical, survey and other
(Table VIII).
6.1 WCM practices
Survey by Kim et al. (1992) studied the WCM practices of Japanese firms in the USA. The
primary focus of survey was to determine the objective of WCM and identify major
options of short-term fund in Japanese firms operating in the USA. However, Belt and
Smith (1991) made an attempt to compare working capital practices of the USA and
Australia. This study, based on the survey of Smith and Sell, was published in 1980.

Figure 6.
Classification by type of
economy

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Serial number

Article

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33

Deloof (2003)
Shin and Soenen (1998)
Lazaridis and Tryfonidis (2006)
Garca-Teruel and Martinez-Salano (2007)
Raheman and Nasr (2007)
Padachi (2006)
Jose et al. (1996)
Howorth and Westhead (2003)
Weinraub and Visscher (1988)
Filbeck and Krueger (2005)
Wang (2002)
Chiou et al. (2006)
Gill et al. (2010)
Rafuse (1996)
Mathuva (2009)
Appuhami (2008)
Nazir and Afza (2009a, 2009b)
Dong and Su (2010)
Samiloglu and Demirgunes (2008)
Ganesan (2007)
Ramachandran and Janakriraman (2009)
Raheman et al. (2010)
Ricci and Vito (2000)
Binti-Mohamad and Mohd-Saad (2010)
Kolay (1991)
Vishnani and Shah (2007)
Baos-Caballero et al. (2010)
Chakraborty (2008)
Singh and Pandey (2009)
Hofmann and Kotzab (2010)
Nazir and Afza (2009a, 2009b)
Zariyawati et al. (2009a, 2009b)
Nobanee and Al-Hajjar (2009)

Number of citations
304
249
157
146
115
96
92
59
56
55
54
45
44
36
34
26
26
26
24
23
22
20
19
18
18
17
16
16
15
15
14
13
10

Both studies used same questionnaire to enable comparison of practices. The results
show significant differences in working capital practices between both countries. The
policy setting and daily management of working capital accounts of Australian firms
are more centralized than that of US firms. Australian firms seem to lag behind US firms
in inventory, credit collection and marketable securities management.
Studies by Noreen et al. (2009) and Ricci and Morrison (1996) geared toward finding
out international WCM practices of multinational firms regarding international cash
management operations, international sales and foreign exchange activities. Findings of
the study by Ricci and Morrison (1996) reveal that firms appear to have high level of
sophistication in managing international cash operations. Howorth and Westhead
(2003) investigated the working capital practices of small- and medium-sized firms of
UK. Findings of their study conclude that small- and medium-sized firms report
different degrees of difficulty in obtaining finance, more particularly to meet their

Working capital
management

183

Table VI.
List of citations of
working capital articles

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184

Serial number

Journal

1
2
3
4
5
6
7
8
9
10
11
12
13
14

Journal of Business Finance & Accounting

Mid-American Journal of Business
Mediterranean Journal of Social Sciences
Research Journal of Business Management
Rivier Academic Journal
Accounting And Finance
African Journal of Business Management
Annales Universitatis Apulensis Series Economica
Asian Journal of Management
Asian Review of Accounting
Business and Economics Journal
Economics and Finance Review
European Financial Management
European Journal of Economics, Finance And
Administrative Sciences
FEP Working Papers
Financial Practice And Education
Global Business Review
Global Finance Journal
Global Journal of Business Research
The ICFAI University Journal of Financial Economics
Interdisplinary Journal of Contemporary Research in
Business
International Research Journal of Finance and
Economics
International Journal of Applied Economics and
Finance
International Journal of Business And Management
International Journal of Economics and Finance
International Journal of Economics and Finance
Studies
International Journal of Economics And Financial
Issues
International Journal of Managerial Finance
International Management Review
International Research Journal Of Finance And
Economics
International Review of Business Research Papers
International Symposium On Finance and Accounting
Journal of African Business
Journal of Applied Finance & Banking
Journal of Business & Economics Research
Journal of Business Logistics
Journal of Economics And Behavioral Studies
Journal of Economics And Finance
Journal of Financial And Strategic Decisions

15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

Table VII.
List of most citied
journals

31
32
33
34
35
36
37
38
39

Number of
citations

Number of
papers

304
55
3
34
23
16
1
4
3
5
44
9
19
6

1
1
1
1
1
1
1
1
1
1
1
1
1
2

4
253
24
9
7
15
2

1
2
2
1
2
1
1

20

24

19
1
4

2
1
1

148
26
41

2
1
5

211
3
18
3
6
15
4
92
56

2
1
1
2
1
1
1
1
1
(continued)

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Serial number

Journal

40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59

Journal of Financial Management And Analysis

Journal of Global Business and Economics
Journal of Modern Accounting and Auditing
Journal of Multinational Financial Management
Journal of Purchasing & Supply Management
Management Accounting Research
Management Decision
Managerial Finance
Managing Global Transitions
Research Journal of Business Management
Revista De Administracao De Empresas
SSRN
The ICFAI Journal of Applied Finance
The ICFAI Journal of Management Research
The International Journal Of Finance
The IUP Journal of Applied Finance
The IUP Journal of Management Research
The Journal of American Academy of Business
The Lahore Journal of Economics
World Applied Sciences Journal

Number of
citations

Number of
papers

157
4
13
54
1
59
60
3
22
1
1
10
14
16
3
26
1
45
3
9

1
1
1
1
1
1
3
1
1
1
1
1
1
1
1
1
1
1
1
1

WCM practices

Impact of WCM

Others

Empirical
Chiou and Cheng (2006),
Narender et al. (2008),
Nazir and Afza (2009a,
2009b), Weinraub and
Visscher(1998), BaosCaballero et al. (2010)

Wang (2002), Deloof (2003),

Jose et al. (1996), GarcaTeruel and Solano (2007),
Gill et al. (2010), Mathuva
(2010), Dong and Su (2010)

Lind et al. (2012), Balakrishnan (2011),

Appuhami (2008)

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management

185

Table VII.

Survey
Kim et al. (1992), Belt
and Smith (1991),
Noreen et al. (2009),
Ricci and Morrison
(1996), Howorth &
Westhead (2003),
Padachi et al. (2012)
Others
Pass and Pike (1987), Pass and Pike
(1984), Sunday (2011)

Table VIII.
Classification of most
cited articles

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186

working capital requirements. The research has also highlighted the importance of
networking and bootstrapping finance as a solution to the working capital financing of
small- to medium-sized firms. Padachi et al. (2012) examined 11 specified WCM routines
of a large random sample of small companies in the UK.
Research related to WCM practices have also been studied with statistical analysis of
archival data. Major focus of such studies is on identifying the determinants of WCM in
different industries, except Raheman et al. (2011) who compared sector-wise WCM
performance through ratio analysis and provided standard measure of working capital
efficiency. Chiou et al. (2006) and Narender et al. (2008) analyzed the determinants of
WCM by using net liquid balance and working capital requirements as measures of a
companys WCM. Results of Chiou et al.s (2006) study indicate that the debt ratio and
operating cash flows affect the companys WCM, and there is a lack of consistent
evidence for the influence of the business cycle, industry effect, growth of the company,
performance of the company and firm size on the WCM. Narender et al. (2008) found a
significant influence of firm size and debt ratio on WCM of Indian cement companies.
Nazir and Afza (2009a, 2009b) established a relationship between the working capital
requirement and different internal and external determining factors of Pakistani firms by
using regression analysis. Results of the study found that operating cycle, leverage, return
on assets (ROA) and Tobins q are the internal factors which are influencing the working
capital requirements significantly. The WCM practices are also related to the industry and
different industries follow different working capital requirements (Nazir and Afza, 2009a,
2009b).
Research study by Weinraub and Visscher (1998) examined ten diverse industry groups
to establish the relative relationship between aggressive and conservative working capital
practices. Results strongly show that the industries have significantly different current asset
management policies. Industry policies concerning relative aggressive/conservative liability
management were also significantly different. Baos-Caballero et al. (2010) analyzed the
determinants of CCC of Spanish small- and medium-sized enterprises (SMEs). It was found
that older firms, which have better access to external capital, maintain longer CCC. Hence, it
appears that firms with better access to the capital markets maintain a more conservative
working capital policy because of their lower costs for financing.
6.2 Impact of WCM on profitability of firm
Many researchers have established a relationship between WCM and profitability.
Wang (2002) in his study found a negative relationship between return on
investment and CCC of firms operating in Japan and Taiwan. After that, this finding
has been tested several times by other researchers with different sample and
measures of profitability with fairly consistent results. Also, Deloof (2003), with the
sample of 1,009 Belgian firms, found significantly negative relation between the
gross operating income and number of receivable accounts and inventory. He also
found negative relation between cycle time of accounts payable and corporate
profitability which is inconsistent with the argument of shorter CCC of Jose et al.
(1996). Falope and Ajilore (2009), with the help of panel data analysis of Nigerian firms,
supported the argument of Deloof (2003) about cycle time of account payable and
profitability. Garca-Teruel and Solano (2007), using similar variables as of Deloof (2003)
found significant negative relation between ROA and number of accounts receivable
and inventory for a sample data of 8,872 SMEs of Spain. Results of the studies by

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Garca-Teruel and Solano (2007) and Gill et al. (2010) regarding the average days of
accounts payable and the profitability of the firm found no statistically significant
relationship between these variables. On the other hand, Dong and Su (2010) and
Mathuva (2009) found significantly positive relation between these variables. Mathuva
(2009) also found positive relation between profitability and number of days inventory
which is inconsistent with the findings of Deloof (2003), Garca-Teruel and Solano (2007)
and Falope and Ajilore (2009). Mathuva (2009) argued that high inventory level reduces
the cost of possible interruption in the production and loss of business due to scarcity of
product.
6.3 Other studies of WCM
WCM research is mainly clustered around two dominant themes, as discussed above.
However, closer examination of literature on WCM revels that few articles on other
issues than discussed above were also found. Lind et al. (2012) has used financial value
chain analysis to examine WCM by cycle times in the automotive industry. The
researcher found that the average CCC of the automotive industry was 67 days for
2006-2008. Balakrishnan (2011) in his paper studied emerging electronic payments
options as a tool of improving WCM and profitability of firms in India. On the other
hand, Appuhami (2008), for 416 industry firms of Thailand, found highly significant
relationship between capital expenditure and working capital requirement. Scholleova
(2012) highlighted the impact of economic crisis of 2007 on the efficiency of WCM in
Czech Republican firms.
7. Findings from literature review
Based on the analysis of retrieved publications, we identified gaps and limitations in
research methods, study settings and theoretical frameworks. We found following
issues most relevant to WCM literature.
7.1 Lack of systematic theory development
Lack of systematic theory development in WCM research has been noted in the analysis.
This may be due to two main reasons. First, a relatively smaller amount of WCM
research, and, second, major focus of researchers is on testing the hypotheses of WCM
and profitability of firm. Only five conceptual papers were identified in the review.
Sunday (2011) evaluated and proposed an appropriate WCM policy for SMEs in his
study, whereas Kolay (1991) proposed a system dynamics approach for managing
working capital crisis. This leaves an opportunity for developing systematic theory for
WCM by adding future research.
7.2 Dominance of empirical research
The review shows that the majority of research articles are based on secondary data and
are empirical in nature; only few researchers like Noreen et al. (2009), Kim et al. (1992)
and Howorth and Westhead (2003) used the survey approach to identify the prevailing
practices of managing working capital in different economic setting, whereas Belt and
Smith (1991) used comprehensive survey for comparing working capital practices and
assess the impact of institutional difference on the same across the USA and Australia.

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management

187

7.3 Lack of inter-country research

All research articles were reviewed except Belt and Smith (1991), and Khoury et al.
(1999) used a sample of single country for the analysis. Only Belt and Smith (1991) made
an attempt to compare working capital practices of the USA and Australia. Khoury et al.
(1999) expand this survey for Canadian small firms.

188

8. Conclusion
The primary aim of this review was to identify and analyze the main characteristics of
WCM literature to contribute more in-depth understanding of the research domain. This
has been carried out by adopting SLR methodology. A set of 126 research articles were
published during 1980-2012, pertaining to WCM, were identified and analyzed. It was
observed that the number of research articles in WCM is increasing but the quality of
articles can be questioned due to the replications of one or two original ideas and low
citation count. Major focus of WCM research is on studying the relationship between the
WCM and profitability of firm. Literature on WCM has concluded that profitability of
firm can increase by reducing the amount invested in working capital. Researchers were
reluctant in adopting methods like case study and primary survey to study the WCM
practices of firms. From the complete discussion, it can be concluded that future
researcher should break the monotony in their research purpose for systematic theory
building to set more insight of WCM practices and determinants in a company
(Table IX).

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9. Scope for future research

Our review of WCM literature has highlighted conceptual and methodological issues
which by themselves, properly addressed, hopefully serve as guidance for future

Research question

Main conclusion

How articles are placed in time?

Publication of articles has peaked in 2011 and

2012. This could be caused by recent economical
slow down which boost the importance of
working capital management
Major attention of researchers is directed toward
studying the relation between WCM and
profitability
The most common research method is statistical
analyses performed with correlation and
regression analyses. Data have been used both
from small- and big-sized firms, but big-sized
firms dominate the literature
It seems that Deloof (2003) and Garca-Teruel and
Martinez-Salano (2007) are the most important
articles according to number of citations.
However, their popularity is largely caused by the
fact that they are early articles that
studied the relation between profitability and
WCM, a topic that has been studied a lot

What has been studied about working capital

management?
What research methods and data have been
used?

What are the most important articles about the

topic?

Table IX.

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research. Howe ever, considering the increasing interest in WCM research in recent time,
we feel encouraged to suggest additional avenues for future research:
One such avenue warranting research attention is behavioral finance approach.
Existing research literature focus on various determinants of WCM but left the
behavioral aspect and biases of corporate treasures in managing working capital.
Future study can be done to document the behavior of corporate treasurers in their
decision-making process in the areas of cash, inventory, accounts receivable,
accounts payable and risk management
Most of the researchers like Deloof (2003) have analyzed a linear relation between
firms investments in working capital and advocate that firms profitability can be
increased by lowering the investment in working capital. However,
Baos-Caballero et al. (2012) in their study explained that these studies ignored the
higher risk of loss of sales and interruptions in the production process that is
related with low levels of working capital. Therefore, there might be a working
capital level at which a reduction in working capital negatively affects a firms
profitability. The relation between working capital and a firms profitability may,
consequently, be concave rather than linear, and might be better captured by a
quadratic relationship. Unlike previous studies, future research can contribute to
the literature by analyzing the quadratic relationship between investment in
working capital and profitability by taking into account the possible non-linearity
of the WCM.
Future research can also be directed toward the establishment of industry-specific
measures for managing working capital by using multiple case study methods.
The formulation of conceptual framework required an in-depth understanding of
WCM practices in actual organizational setting. Multiple case studies provide a
stronger base for theory building (Yin, 2003) emphasized that multiple cases
generate a more robust theory because the propositions are more deeply grounded
in diverse empirical evidence.
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industry, Research Journal of Applied Sciences and technology, Vol. 4 No. 13, pp. 1868-1874.

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About the authors
Harsh Pratap Singh is a Research Scholar at the Department of Management Studies, Malaviya
National Institute of Technology, Jaipur, India.
Satish Kumar is an Assistant Professor at the Department of Management Studies, Malaviya
National Institute of Technology, Jaipur, India. Satish Kumar is the corresponding author and can
be contacted at: scholar.satish@gmail.com

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