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VERSLAS: TEORIJA IR PRAKTIKA / BUSINESS: THEORY AND PRACTICE
ISSN 1648-0627 / eISSN 1822-4202
2019 20: 61–68
and Nasr 2007). Previous studies have shown the eects
of working capital management on liquidity (Adekola
etal. 2017, Attom 2016) and protability (Al-abass 2018,
Deloof 2003, Hien Tran et al. 2017, Panda and Nanda 2018,
Raheman et al. 2010, Raheman and Nasr 2007). e studies
not only focus on larger rms as their sample rms (Altaf
and Shah 2018, Atta et al. 2017, Bagh et al. 2016) but also
on small and medium enterprises (Afrifa 2015, Afrifa and
Tingbani 2018, Lamptey et al. 2017).
Firms’ ability to manage their working capital will not
only increase their prots but also their growth. In relation
to rms’ growth, Higgins (1977) introduces the concept
of sustainable growth rate that indicates rms’ maximum
sales growth without having to change their nancing de-
cisions. Sustainable growth rate refers to rms’ maximum
growth rate by only relying on internal nancing, and not on
WORKING CAPITAL MANAGEMENT AND ITS INFLUENCE ON PROFITABILITY
AND SUSTAINABLE GROWTH
Pambayun Kinasih Yekti NASTITI1, Apriani Dorkas Rambu ATAHAU2,
Faculty of Economics and Business, Universitas Kristen Satya Wacana, Salatiga, Indonesia
E-mails: firstname.lastname@example.org; email@example.com;
firstname.lastname@example.org (corresponding author)
Received 31 October 2018; accepted 10 January 2019
Abstract. is study aims to test the eect of working capital management on rms’ protability and the eect of this relation-
ship on sustainable growth. Our sample rms are 136 manufacturing rms listed in the Indonesian Stock Exchange from 2010
to 2017. We use data panel regression with xed eect estimation model to analyze our data. e results demonstrate that work-
ing capital signicantly aects rms’ protability. However, working capital management does not exhibit a signicant direct
inuence on sustainable growth but a signicant indirect inuence through rms’ protability. us, this study suggests that
rms need to manage their working capital to increase their prots and eventually to achieve sustainable growth. is study
contributes by including sustainable growth in the analysis of the relationship between working capital and rm performance.
In addition, this study will likely contribute to managers in eorts to increase sustainable growth for their enterprises through
working capital management.
Keywords: working capital management, protability, sustainable growth, cash conversion cycle, return on assets, manufacturing
in dus try.
JEL Classication: G31, G39, C23.
Working capital management aims to increase protability
and at the same time to enable rms to repay their mature
liability by ensuring their liquidity (Pass and Pike 1996).
us, it is necessary that rms balance these two objectives
in their activities (Gitman 2011). Working capital mana-
gement is closely related to the decisions on rms’ asset
composition and current liabilities that imply on rms’
protability (Adekola et al. 2017, Deloof 2003, Mannori and
Mohammad 2012). Further, Misbah et al. (2015) indicates
that working capital management is the essential element
of rms’ daily operating activities.
Managerial inability to manage working capital will po-
tentially create nancial diculties for rms (Smith 1973).
On the contrary, rms with well-managed working capital
are likely to demonstrate increased performance (Raheman
additional nancing (such as new investors or long-term li-
abilities). Ashta (2008) and Fonseka et al. (2012) suggest that
rms base their operating activities on sustainable growth.
Firms that operate above their sustainable growth are poten-
tially prone to nancial distress or even bankruptcy because
of excessive nancial leverage. Meanwhile, rms that fail
to achieve sustainable growth run a risk of slow or even
e ability to manage working capital is closely re-
lated to sustainable growth (Churchill and Mullins 2001,
Rădăşanu 2015). For example, rms that manage their sales
policies well will produce sucient cash ows for their
operating activities and eventually increase their prots.
Further, protability plays an important role in sustainable
growth (Shapiro and Balbirer 2000). Several studies, such
as Amouzesh et al. (2011), Mukherjee and Sen (2018) and
Manaf et al. (2018) support this argument by demonstrating
the eect of protability on rms’ sustainable growth. It then
can be predicted that working capital management aects
sustainable growth through rms’ protability. us, the
role of rms’ protability as a mediating variable between
working capital management and sustainable growth is an
interesting research avenue.
Specically, this study aims to: (i) test the eect of work-
ing capital management on rms’ protability, (ii) investi-
gate the eect of rms’ protability on sustainable growth,
and (iii) analyze the eect of working capital management
on sustainable growth as mediated by protability. We fo-
cus on manufacturing rms because these rms exhibit a
relatively high proportion of working capital and even it is
not uncommon that working capital constitutes more than a
half of manufacturing rms’ total assets (Ahmad and Samim
2018, Deloof 2003, Wasiuzzaman 2015). Besides, manu-
facturing rms play a strategic role in countries’ national
economy (Raheman et al. 2010). Specically, manufactur-
ing rms exhibit the largest contribution to GDP (20.16%)
and export (75.99%) of the Indonesian economy. Indonesia
even ranks fourth from 15 countries in terms of the contri-
bution of the manufacturing sector to GDP. As a developing
country, Indonesia itself exerts a signicant inuence on the
economic growth in South East Asia because it recorded
the economic growth of 5% in 2017 (according to Statistics
Indonesia) and have the largest GDP in this region.
is study contributes to the literature by extending
the working capital research model that heavily focuses
on protability. Most of the previous studies focus on only
the impact of working capital on protability (Deloof 2003,
Hien Tran et al. 2017, Raheman et al. 2010) although prof-
itability itself aects sustainable growth (Amouzesh et al.
2011, Hien Tran et al. 2017, Manaf et al. 2018, Shapiro and
Balbirer 2000). Further, working capital management is also
closely related to sustainable growth (Churchill and Mullins
2001, Rădăşanu 2015). However, so far there are no studies
that investigate the eect of working capital management on
sustainable growth. It is also expected that this study oers
a managerial implication by suggesting that managers pre-
pare more specic working capital management to enhance
their protability and to achieve sustainable growth.
1. Literature review and hypothesis development
e importance of working capital management is clo-
sely related to the fact that most companies invest large
amounts of money into current assets and rely on current
liabilities as a source of nancing (Deloof 2003, Koralun-
Bereźnicka 2014) Working capital management consists of
all decisions that are related to the management of current
assets and liabilities, i.e. determining the optimal amount
of cash, receivables, inventory, and current liabilities and
the relationship between current assets and current liabi-
lities (Abuzayed 2012). Working capital management also
refers to nancing and investing activities and net current
asset control through various rms’ policies (Padachi et al.
2012).By managing their working capital, rms can shorten
their operating and cash cycles and eventually increase their
protability (Hien Tran et al. 2017, Raheman et al. 2010).
e shorter the rms’ operating and cash cycles, the more
likely are rms to generate prots.
In recent years, scholars have begun to demonstrate
their interests in investigating the strategic role of work-
ing capital management in rms. Most previous studies
indicate that working capital management aects prot-
ability. Raheman et al. (2010) analyze the relationship be-
tween working capital management and protability in 204
listed manufacturing rms in the Karachi Stock Exchange,
Pakistan, from 1998 to 2007. e ndings suggest the nega-
tive relationship between working capital management as
indicated by inventory and receivable turnover with rms
protability (as indicated by net operating prot). Using 88
US rms listed in the New York Stock Exchange in 2005–
2007 as the sample rms, Gill et al. (2010) show that short-
ening the receivable collection period arguably increases
protability. Vural (2012) have also investigated the role
of working capital management in explaining protability.
Using 75 manufacturing rms listed in the Istanbul Stock
Exchange in 2002–2009 as the sample, they demonstrate
that the receivable collection period and cash cycle are nega-
tively related to rms’ protability. us, the results imply
that longer receivable collection period will negatively aect
rms’ protability. In a similar vein, the longer cash cycle
reduces rms’ protability. Further, using 200 Vietnamese
manufacturing rms listed in the Hanoi Stock Exchange
(HSE) from 2010 to 2012, Hien Tran et al. (2017) show that
working capital management signicantly aects protabil-
ity. Based on the previous arguments and empirical studies,
the following is our rst hypothesis:
62 P. K. Y. Nastiti et al. Working capital management and its inuence on protability and sustainable growth
H1: Working capital management signicantly aects
Sustainable growth indicates annual sales growth
that is consistent with rms’ nancing policy (Higgins
1977). Based on rms’ nancing policy, managers will be
able to determine the maximum sales level of their rms
(Momčilović et al. 2015) that will not negatively aect their
cash ows (Ashta 2008). Firms’ nancing policy is related to
their decisions not to issue new shares and maintain their
debt to equity (DER) ratio at certain levels. Consequently,
the focus of sustainable growth is not only the funds needed
to achieve expected growth rate but also the extent of rms’
ability to develop by using their existing internal nancing
sources (Shapiro and Balbirer 2000).
Rădăşanu (2015) explains that working capital manage-
ment is closely related to sustainable growth. An eective
working capital management helps rms maintain their
liquidity that enables them to have sucient cash ows to
repay mature short-term liabilities and to acquire lower
cost of capital (Barine 2012). Further, previous studies
of Amouzesh et al. (2011) and Fonseka et al. (2012) nd
that liquidity aects sustainable growth. Besides, eective
working capital helps rms reduce the stock-out risk and
acquire sucient nancing sources to operate. us, rms
will manage to achieve sustainable growth. Based on these
arguments, we propose our second hypothesis:
H2: Working capital management signicantly aects
Sustainable growth is in line with the pecking order
theory that argues that rms should prioritize internal -
nancing sources over the external ones such as debt and
share issuance because internal nancing sources have a
lower cost of capital. Issuing new shares potentially provide
a negative signal because rms issue new shares usually
when they lack sucient internal funds and rms cannot
issue new debts (Palombini and Nakamura 2012).
e availability of internal nancing is closely related to
rms’ ability to generate prots. us, rms have to con-
stantly strive for increasing their protability. Amouzesh
et al. (2011) nd the relationship between protability and
sustainable growth. Further, Manaf et al. (2018) also demon-
strate a signicant positive relationship between protabil-
ity and sustainable growth. All in all, these studies suggest
that higher protability will increase sustainable growth. It
is possible that working capital management aects sustain-
able growth through protability. As stated by Churchill and
Mullins (2001) if rms manage to shorten their operating
cycles, to reduce cash needed during their operating cycles,
and to generate more cash during their operating cycles,
they can increase their prots and eventually their sustain-
able growth. Consistent with the previous arguments and
empirical studies, the following is our third hypothesis.
H3: Firms’ protability mediates the signicant eect of
working capital management on sustainable growth.
2. Research method
2.1. Data sample
Our sample rms are all manufacturing rms listed in the
Indonesian Stock Exchange (IDX) from 2010 to 2017 (136
rms). We use the 2010–2017 period as our observation
years because in these years rms have arguably survived
the latest global nancial crisis in 2008. us, their nan-
cial condition is less likely to be aected by the crisis. We
generate our data from sample rms’ relevant published
nancial statements. Our panel data approach compares
the nancial condition of rms from the same industry in
a single country (Indonesia). Specically, our data sources
are rms’ formal websites, the website of the Indonesian
Stock Exchange (http://www.idx.co.id) and IDN Financials
2.2. Variables measurement
e dependent variable is sustainable growth. We measure
this variable by using the sustainable growth rate (SGR)
that is the multiplication between ROE and Retention Rate
(Higgins 1977). Meanwhile, our independent variable is
working capital management as empirically indicated by
cash cycle (CCC) because theoretically cash cycle shows
the period needed by rms to convert their cash outows to
cash inows. is indicator strongly represents rms’ wor-
king capital management (Hien Tran et al. 2017). Further,
protability, as measured with return on assets or ROA
(Mehta 2017, Oseifuah and Gyekye 2016) is the media-
ting variable. Lastly, our control variables are the rm size
(FRSIZE), sales growth (SALESGR), leverage (LEV) and
total asset turnover (TATO). We use these control varia-
bles to mitigate the size eect. Several previous studies on
working capital management use leverage as the control
variable because this variable is likely to be closely related
to the change in working capital management (Deloof 2003,
Hien Tran et al. 2017, Vural 2012).
2.3. Analytical technique
We empirically test the relationship between variables and
to analyze the presence of the mediating variable in this
relationship using STATA version 14. In line with the for-
mulation of the hypothesis, we use the following estimation
Business: eory and Practice, 2019, 20: 61–68 63
SGR – Sustainable Growth Rate, dependent variable
CCC – Cash Conversion Cycle, independent variable
ROA – Return on Assets, mediating variable
SALESGR – Sales Growth, control variable
FRSIZE – Firm Size, control variable
LEV – Leverage, control variable
TATO – Total Assets Turnover, control variable
β0 – Constant
β1–6 – Regression Coecient
Model I demonstrates the direct eect of the CCC vari-
able as an indicator of the working capital management
variable on ROA as an indicator of protability. Meanwhile,
model II explains the direct eect of the CCC variable on the
SGR variable. Lastly, model III shows the impact of the CCC
variable on the SGR variable through ROA as a mediating
variable. e conceptual relationship among dependent,
mediating and independent variables used in this study is
presented in Figure 1.
According to Baron and Kenny (1986), there are three
alternative results of the mediating eect. Firstly, the eect
of the independent variable on the dependent variable be-
comes insignicant (or vice versa) in the presence of the me-
diating variable. is eect implies that the mediating vari-
able acts as the full mediator in the relationship. Secondly,
the eect of the independent variable on the dependent
variable remains signicant in the presence of the mediating
variable, suggesting that partial mediation exists. irdly,
when these two conditions are absent, the mediation eect
is considered insignicant.
Baron and Kenny (1986) explain that there are two con-
ditions that have to be fullled for the method to qualify,
namely the a, b, and c coecients should be signicant
and the c’ coecient < c. However, the signicance of the
a and b coecients is sucient to indicate the mediating
eect although the c coecient is insignicant (MacKinnon
2008), implying that it is likely that the relationship be-
tween the independent variable and the dependent variable
must be through the mediating variable. Besides, there is an
alternative method to statistically ensure the signicance
of the mediating eect, namely by multiplying the a and b
coecients and then dividing the results with the standard
errors of both coecients ( ). is
method, labeled as the product of the coecient method,
searches for Z value. If Z value is grthe eater than the value
of Ztable , then there is an indirect eect of the independent
variable on the dependent variable or, in other words,
the mediating eect exists. Sobel test, Arorian test, and
Goodman test use this approach to test the signicance of
the mediating eect.
Before testing our hypothesis, we initially determine the
appropriate panel data estimation model using the following
tests: Chow test, Hausman test, and Lagrange Multiplier.
Chow test aims to determine whether a common eect or
xed eect model is more appropriate to estimate panel
data (H0: common eect model, H1: xed eect model).
Meanwhile, the Hausman test selects a xed eect or ran-
dom eect model (Ho: random eect model, H1: xed
eect model). Further, the Lagrange multiplier test selects
random or common eect (Ho: common eect model, H1:
random eect model). If p-value of each test < 0.05 then Ho
is rejected and vice versa. We run a L agrange multiplier test
aer Chow test or Hausman test.
3. Findings and result
3.1. Descriptive statistics
e descriptive statistics describe our data by using the
mean, standard deviation, minimum, and maximum values
as the indicators. is study uses data from 136 Indonesian
manufacturing rms from 2010 to 2017. We generate the
data for our independent, mediating, dependent, and
control variables from the Indonesian Stock Exchange and
IDN Financials websites.
Table 1 shows that the mean value of the sustainable
growth rate of Indonesian manufacturing rms is 3.45%.
Although Indonesian manufacturing rms grow, they still
lack internal funds to facilitate their growth. Long-term
Figure 1. Mediating eect
Table 1. Descriptive Statistics (secondary data, processed)
Variables Mean Standard
Deviasi Minimum Maximum
SGR (%) 3.45 30.23 –483.04 192.29
CCC (days) 131.57 109.57 –548.53 729.54
ROA (%) 5.24 10.77 –81.11 74.07
(%) 11.55 37.28 –100 594.73
FRSIZE 21.26 1.57 17.13 26.40
LEV (%) 33.72 45.35 0.04 478.05
(times) 1.08 0.57 0.02 4.14
64 P. K. Y. Nastiti et al. Working capital management and its inuence on protability and sustainable growth
liabilities remain important nancing sources for these
rms. Meanwhile, the mean value of rms’ protability
is only 5.24% and relatively varies between rms as indi-
cated by the standard deviation and the range between the
minimum and maximum values. On the other hand, in
general, Indonesian manufacturing rms exhibit cash cy-
cles. Specically, rms in machinery and heavy equipment
sub-sectors exhibit cash cycles. Besides, rms in cigarette
and textile and garment subsectors have greater inventory,
causing their inventory periods to be also high. We conjec-
ture that rms with greater inventory levels aim to ensure
the availability of their materials.
3.2. Hypothesis testing and discussion
is study uses the Pearson correlation matrix of the total
sample and VIF (Variance Ination Factor) to test the mul-
ticollinearity between explaining variables. Table 2 displays
the results of the Pearson correlation and VIF. e results
suggest that no correlation coecient is higher than 0.7 and
relatively low while no VIF value is greater than 10. us, it
can be concluded that there is no multicollinearity problem.
We r un panel data regression to test our hypotheses. is
method oers an advantage that is absent in the time-series
and cross-section methods. In this respect, the panel data
method manages to overcome several problems such as
heteroscedasticity and multicollinearity (Baltagi 2005).
Initially, we run several tests to determine the appropriate
panel date estimation method. Specically, the Chow test
determines whether the pooled regression or xed eect is
more appropriate to determine the panel data estimation
method. As shown by Table 3, the results of the Chow test
indicates that the xed eect is more appropriate to estimate
all regression models (prob>F is less than 0.05). We then run
Hausman test to select a xed eect or random eect. e
results of the Hausman test suggest that xed eect is more
appropriate for all models. To ensure the robustness of our
results, we apply the robustness xed eect test (Table 3).
e table demonstrates that working capital manage-
ment exhibits a signicantly positive inuence on rms’
protability (Model 1). In other words, longer cash con-
version cycles even increase rms’ protability. We explain
these ndings by suggesting that longer cash cycles due to
higher levels of inventories will reduce costs driven by stock-
outs. us, rms are willing to stock more inventories to
ensure the continuity of their business processes. Besides,
longer cash cycles are likely to be aected by rms’ decisions
Table 2. Correlation Matrix (secondary data, processed)
SGR CCC ROA SALESGR FRSIZE LEV TAT O VIF
CCC –0.097 1 2.59
ROA 0.400 –0.117 1 1.55
SALESGR 0.103 0.001 0.095 1 1.17
FRSIZE 0.044 –0.206 0.148 0.021 1 7.99
LEV –0.110 0.095 –0.320 –0.017 –0.020 1 1.75
TATO 0.177 –0.372 0.318 0.050 –0.165 –0.030 1 5.33
Table 3. Regression Results (secondary data, processed)
Variables Model 1 (CCC-ROA) Model 2 (CCC-SGR) Model 3 (CCC-ROA-SGR)
SGR Fixed Eect Fixed Eect
Robust Fixed Eect Fixed Eect
Robust Fixed Eect Fixed Eect
CCC 0.02*** 0.02*** –0.06*** –0.06 –0.08*** –0.08*
ROA 1.70*** 1.70*
SALESGR 0.04*** 0.04*** 0.12*** 0.12 0.07* 0.07
FRSIZE –0.46 –0.46 2.73 2.73 3.38 3.38
LEV –0.11*** –0.11*** –0.05 –0.05 0.14** 0.14**
TATO 6.46*** 6.46*** 12.57** 12.57* 2.44 2.44
F-test 35.19*** 17.71*** 6.81*** 3.12** 22.92*** 3.21**
R-square 0.1719 0.0426 0.1211
Chow Test 9.08*** 2.09*** 2.14***
Hausman Test 19.69*** 14.26** 28.34***
Notes: *signicant at 10%, ** signicant at 5%, *** signicant at 1%.
Business: eory and Practice, 2019, 20: 61–68 65
to invest in receivables to realize their sales. Although we
fail to empirically show that short cash cycles aect rms’
protability, our results are in line with Abuzayed (2012)
who also demonstrate the positive relationship between
working capital management and protability.
Meanwhile, for model 2, the results of the xed eect
robustness show that working capital management does
not directly aect sustainable growth. ese ndings are
inconsistent with Fonseka et al. (2012) who show that
working capital management aects sustainable growth.
As empirically shown by the next model, we argue that it is
likely that our insignicant results are due to the presence
of other variables that mediate the eect of working capital
management on sustainable growth.
However, aer including rms’ protability in the speci-
cation, working capital management signicantly aects sus-
tainable growth (Model 3). Also, the results suggest that rms’
protability signicantly aects their sustainable growth.
Increased rms’ ability to generate prots will enhance their
sustainable growth. Our results are in line with previous stud-
ies that demonstrate that protability aects rms’ sustainable
growth (Amouzesh et al. 2011, Fonseka et al. 2012, Manaf et al.
2018, Rahim 2017). ese ndings suggest that increased prof-
itability will provide more internal funds for rms to support
sustainable growth. Besides, the inclusion of the protability
variable in the specication that changes the signicance of
the eect of working capital management and sustainable
growth (from an insignicant eect to a signicant eect),
we conclude that protability is a variable that mediates the
relationship between these two variables.
Besides, the results of the Sobel test, Goodman (Arorian)
test, and Goodman test in Table 4 conrm that protability
mediates the relationship between working capital man-
agement and sustainable growth. Accordingly, rms can
increase their sustainable growth by increasing their ability
to generate prots or protability. Increased protability
facilitate rms to generate interna l funds that are important
to increase their sustainable growth. In this condition, rms
are likely to grow without having to rely much on external
nancing with higher nancing costs for their investments
in current and xed assets. us, working capital manage-
ment that is closely related to the way rms manages their
business operations becomes very crucial. Firms can adopt
appropriate working capital management policies. Further,
because our empirical ndings demonstrate that longer cash
cycles positively aect protability, conservative investment
policies in current assets and current assets nancing can
be alternative working capital policies for manufacturing
rms. However, rms should not invest in cash, securities,
receivables, and inventor y too much because it will increase
their holding cost and nancing cost that harm their prot-
ability and eventually their sustainable growth.
Conclusions and future research
is study analyzes the relationship between working capi-
tal management, rms’ protability, and sustainable growth.
e results demonstrate that working capital management
is signicantly associated with rms’ protability. Further,
although not directly aecting sustainable growth, working
capital management signicantly aects sustainable growth
through rms’ protability. Our empirical results oer both
theoretical and practical implications. eoretically, this
study contributes by extending the literature in working
capital management that mainly focuses on protability
and not investigates further the eect of working capital
management on sustainable growth as mediated by rms’
protability. Practically, by demonstrating that protabi-
lity is a variable that mediates the relationship between
working capital management and sustainable growth, our
study advises rms to focus on their working capital mana-
gement to enhance their protability and eventually their
sustainable growth. Increased protability facilitates rms
to acquire more internal funds that will eventually enhance
their sustainable growth. In this condition, rms could
grow without having to rely much on external nancing
sources with higher nancing costs for their investments
both in current assets and xed assets. us, rms have to
pay considerable attention to working capital management.
Further, although our ndings show that longer cash cycles
positively aect rms’ protability, rms should not invest
excessively in cash, marketable securities, receivables, and
inventories and take the holding cost and nancing cost of
these assets into consideration to maintain their protabi-
lity and eventually their sustainable growth.
Previous studies show inconsistent results in investi-
gating the eect of working capital management on rms’
protability. ese inconsistent results oer a research
avenue on the possible non-linear relationship between
these two variables. Further, there are no studies that use
the Indonesian context and test the non-linear relat ionship
between working capital management and protability. e
condition provides an ample opportunity to investigate such
issue in Indonesia. Besides, dierent industry characteris-
tics cause greater variability in rms’ cash cycles. We then
advise future studies focus on the cross-country analysis of
rms in the same industries to generate a better understand-
ing of rms’ working capital management.
Table 4. e results of the mediating eect (secondary data,
Mediation Test Coecient
Goodman-1 (Aroian) 0.0111***
Notes: *signicant at 10%, ** signicant at 5%, *** signicant at 1%.
66 P. K. Y. Nastiti et al. Working capital management and its inuence on protability and sustainable growth
Authors declare that they have no competing nancial,
professional, or personal interests from other parties
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