Working capital management practices of small and medium-sized businesses in New Zealand : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

Small and medium-sized businesses (SMEs) contribute significantly to a country’s economic growth. As the business environment changes constantly; SMEs need support and guidance on how to address working capital management (WCM) issues. Such knowledge will enable them to implement WCM effectively, increase their competitive advantage, and ensure their ultimate survival. Knowledge of WCM in SMEs, including a greater understanding of the WCM practices that SMEs actually employ and their motivations for, and barriers to, WCM, is needed to help SMEs adapt to ever-changing conditions. WCM is central to a business’s profitability, growth, and survival. However, only some SMEs manage working capital (WC) well. Since the early 1980s, poor WCM has been identified as the primary cause of SMEs’ failure, with approximately half of all SMEs failing within the first five years. WCM involves the management of four key business components: cash, inventory, accounts receivable, and accounts payable. The goal of WCM is to achieve an optimal WC level, where the business’s current assets are sufficient to meet its obligations or current liabilities. While excessive WC incurs opportunity costs, insufficient WC increases the risk that a business cannot meet its short-term obligations. Despite its critical role in business success, scholarly literature has shown that, due to SMEs’ unique characteristics, many SMEs lack identifiable, systematic, and/or effective WCM procedures. WCM for SMEs is often overlooked in previous studies. Given the importance of WCM, this research addresses omissions in the WCM literature by examining the WCM practices of New Zealand SMEs. More specifically, it identifies SMEs’ WCM practices, their motivators for, and barriers to, adopting (effective) WCM practices, and actions that SMEs could take to modify their WCM practices to address potential WCM issues. It contributes through the collection of qualitative data to provide deeper insights. The findings draw on questionnaire responses from 164 SMEs from 15 industries, and 11 interviews with SMEs, located in the Auckland and Canterbury regions. The research found that many of the participating SMEs lacked an understanding of the importance of WCM and had limited knowledge of WCM practices or procedures that could be taken to manage WC more effectively. While some of the SMEs lacked any identifiable systematic processes, others adopted informal, ad-hoc WCM practices and/or only basic WCM techniques. The identified causes are related to barriers such as resource constraints, having a simple business model with low sales volumes, and a lack of knowledge and expertise in financial management. Consequently, rather than spending time to identify and develop systematic WCM practices, most of the SME management teams of this research focused on revenue-generating activities or activities perceived to generate a higher return. This may provide insight into other aspects of WCM outside the scope of this research, including why SMEs are less efficient in managing WC, and why they are more vulnerable to financial crises. The research identifies WCM actions, from WCM planning to daily operations monitoring, that, when implemented will assist SMEs in addressing potential WCM issues and subsequently, improving the effectiveness of their WCM. Given their significant role in local economies, this research’s findings have implications that extend far beyond individual businesses.