Working capital management routines in small German craft businesses: an empirical study of the drivers of implementation

Abstract

Using data from a survey of small German craft businesses, this article sheds light on the drivers of working capital management (WCM) efforts of small enterprises and their relation with performance. Unlike previous studies, this article explicitly investigates the routines small firms undertake to manage their working capital (WC). Based on the argumentation of asset orchestration theory, factor and cluster analysis are applied to identify four distinct types of small businesses with regard to their WCM approach. Thereupon, several regression analyses are applied to identify the drivers of this differentiation. The results determine financial education and skill of individual personnel as the main driver of WCM routine implementation in small businesses. Firm age, willingness to grow in size, and ease of access to external funding are also affecting WCM undertakings. Considering performance, evidence indicates a positive association between the implementation of WCM routines and both liquidity and profitability.

Résumé

En s’appuyant sur les données d’une enquête sur les petites entreprises artisanales allemandes, cet article met en lumière les facteurs qui motivent les efforts de gestion des fonds de roulement des petites entreprises et leur rapport avec la performance. À la différence des études précédentes, cet article examine explicitement les routines que les petites entreprises mettent en place pour gérer leurs fonds de roulement. Sur la base de la théorie de l’orchestration des actifs, une analyse factorielle et une analyse en grappes sont appliquées pour identifier quatre types distincts de petites entreprises en ce qui concerne leur approche de la gestion des fonds de roulement. Ensuite, plusieurs analyses de régression sont réalisées pour identifier les déterminants de cette différenciation. Les résultats démontrent que l’éducation financière et que les compétences du personnel individuel sont le principal moteur de la mise en oeuvre de routine de la gestion des fonds de roulement dans les petites entreprises. L’âge de l’entreprise, la volonté de croître en taille et la facilité d’accès aux financements externes ont également un impact sur l’adoption de la gestion des fonds de roulement. Pour ce qui est de la performance, les preuves indiquent une association positive entre la mise en oeuvre de routines de gestion des fonds de roulement et la liquidité et la profitabilité.

Keywords:

• Working capital management
• small business management
• small and medium-sized enterprises (SME)

MOTS-CLÉS:

• fonds de roulement
• gestion de petite entreprise
• petites et moyennes entreprises (PME)

Acknowledgements

The manuscript for this article was previously presented at 2nd EIASM Conference on Management Accounting and Control in SMEs, hosted by European Institute for Advanced Studies in Management. I would like to thank all symposium participants for engaging in intellectually stimulating discussions and offering critical comments. I would also very much like to thank JSBE's anonymous reviewers for their constructive critiques and thoughtful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Additional information

The author is a research associate and doctoral candidate at the Chair of Management Accounting at Technical University of Munich. Research focus is on all aspects regarding finance and financial management of small enterprises.

Notes

1 The crafts sector is an autonomous economic sector in Germany. It encompasses more than 130 different trades ranging from building and finishing, electrics and metalworking, wood- and plastic-working, clothing, textiles and leather, food, health and personal care, to chemicals, cleaning, and graphic design. Whether a trade is part of the craft sector is regulated by §§1–5 and §§18–20 of the German crafts code. The whole craft sector consists of more than 1 million businesses that employ about 6 million people generating more than EUR 650 billion in annual turnover.

2 The Bundesanzeiger is an official publication of the Federal Republic of Germany. It is published by the German Department of Justice. Apart from legal announcements it is also used for any legally mandated announcements of the private sector. As such it contains the financial statements of all companies that are subject to German disclosure obligations.

3 Further analysis also shows that exclusion of potentially influential data points did not have significant impact on the regression results which gives further cause for retention.

4 The difference in means between quartiles 1 and 2 is .09 (t = −5.71). Between quartiles 2 and 3 the difference is .023 (t = −1.97).

Additional information

Notes on contributors

Benedikt Tratt

Benedikt Tratt is a PhD candidate at the chair of Management Accounting at Technical University of Munich. He holds a Master's degree in business administration from Technical University of Munich, specializing in Finance and Accounting. He also is a research associate at the Ludwig-Fröhler-Institute for skilled crafts sciences. His research focuses on various issues of finance and management control in small businesses.