Working Capital Management and Its Impact on SMU’S Performance

Small Manufacturing Units (SMUs) play an important role in the development of the country. The SMU sector has become very important for many economic activities in developing countries because of its special features of capital sparing and labour intensiveness. In fact, these small and tiny sectors are playing a major role in shaping the nations but suffer due to low capital formation, difficulty in accessing adequate finance for their businesses. A well designed and implemented working capital management is expected to contribute positively to the creation of a firm’s value. The purpose of this study was to examine the trends in working capital management and its impact on SMUs performance. The key variables like inventories days, accounts receivables days, accounts payable days, cash conversion cycle and return on total assets are used to analyze the relationship between profitability and working capital management of SMUs. The statistical tool “Pearson Correlation Coefficient” was used which shows that high investment in inventories and receivables is associated with lower profitability and there is a strong significant relationship between working capital management and profitability. An analysis of the liquidity, profitability and operational efficiency of the SMUs shows significant changes and how best practices contribute towards better performance.The growth of small and medium units has been significant in the recent past. The capital base of these small and medium units is very poor and they are facing several financial crises. Shortage of finance is the main problem responsible for a host of problems. The delays in sanctioning of the loan and the neglecting attitude of the bank officials are the main causes behind the bad perception of SMUs towards the banks. Apart from the traditional modes of financing like banks and money lenders, newer sources of financing such as venture capital investment can take care of these SMUs financing requirements. The Central Government should take the initiative in propagating the credit facilities for the SMUs. Financial problems are the root cause of all the problems faced by the SMUs. The Government should encourage, motivate and support entrepreneurs to run their units successfully