Uncovering the hidden roots: the tapestry of working capital efficiency in Indian MSMEs

Abstract

Purpose Working capital efficiency (WCE) is crucial for the sustainability of both large and small firms. This study aims to use the sample of micro, small and medium-sized enterprises (MSMEs) in India and tries to understand the critical determinants of WCE. Design/methodology/approach Using a fixed effect panel data model on a sample of 578 MSMEs (59 micro, 226 medium and 296 small firms), this study explores the relationship between the predictors of WCE. Additionally, the study adopted two metrics for measuring WCE among each type of firm (micro, small and medium). Findings Several firm-specific variables, including leverage (lever), firm age (AGE), firm size (Fsiz), profitability (Prof), extended payment terms (EPT), human capital (HCap), asset turnover ratio (ATR), reverse factoring (RF) and firm growth (FG), have a significant effect on working capital management efficiency (WCE). In contrast, tangibility (Tangib) and salary expenses (Sal) had an insignificant effect on working capital management efficiency. Research limitations/implications The study is based on secondary data. Future studies may incorporate some primary data, which will facilitate qualitative analysis. Originality/value The studies explore the relationship between WCE and expenses in HCap, EPT, RF and Sal as the predictors for WCE, which was not studied earlier in MSMEs scenario, especially in case of developing nation.