Does Efficiency in Working Capital Management Impact the Overall Performance of Firms? Evidence from India

Abstract

Using 514 Indian-listed firms for 11 years (2012–2022), this study provides evidence that efficiency in working capital management (WCM) positively influences the overall financial performance (proxied by return on equity [ROE]). WCM impacts each decomposed component as per DuPont analysis, such as profit margin (PM), asset turn (AT), and equity multiplier (EMR). Efficient WCM enhances PM and AT. Sample firms with longer working capital (WC) conversion cycles have higher EMR, indicating that inefficiency in WCM pushes the firms towards more dependence on debt financing. The shorter inventory days, speedy receivable collections, and prompt payment terms augment ROE, PM, and AT. Longer inventory storage days and generous credit terms extended to the customers increase EMR of the sample firms. The firms with higher EMR delay payment to their suppliers. Furthermore, among the relationship of each DuPont performance lever with ROE, we find that the relationship of PM with ROE is most influenced by efficient WCM for the Indian sample firms compared to the relationship of AT with ROE and the relationship of EMR with ROE.