Working Capital Management In Tunisia

Working Capital Management on Corporate Profitability


This study seeks to understand the impact of working capital management on corporate profitability in the Tunisian context. Working capital management is an important component of corporate finance. It deals with current liabilities and current assets. Thus, it affects liquidity of the company. Using data from a panel sample of 386 small and medium Tunisian export companies observed from 2001 to 2008, we found that there is statistical significance between corporate profitability and the different components of working capital management. This relationship depends on the sector in which the company operates. Furthermore, managers can enhance the profitability of their companies by conducting properly the cash conversion cycle and maintaining an adequate mix between the accounts receivables, the accounts payables and the inventory. This study provides empirical support for the necessity of improving the working capital practices in emerging markets. As such, it suggests new avenues of research for the corporate finance literature. Besides, it offers insights to practitioner interested in enhancing the corporate profitability. In addition, it provides tools for managers of small and medium Tunisian export companies to use in order to be more competitive in the international environment.


Working capital management is a very large area of financial management. It depends on the company’s sector, the business policy, the strategy and the nature of activity. The financial crisis that has spread from 2007 and continued into 2009 leads firms in all sizes to pay a great attention in managing their working capital [1] .

Particularly, small and medium companies are characterized by little liquidity, a high level of current assets and a great dependency on short term debt. Besides, they generally adopt an informal working capital management. Thus, the probability of their default increases and their performance decreases. That’s why they need to control and monitor their working capital to guarantee their short-run solvency and survival. In fact, they have to respond rapidly and properly to unexpected changes in environment (interest rates, raw material prices…) in order to improve their financial performance.

Working capital management has been analyzed in many ways. Some researchers have just described their sample with reporting the percentage of companies using particular working capital management techniques (Maxwell and al., 1998). Other researchers studied working capital routines differences between large and small firms (Howorth and Westhead, 2003). They found that larger firms are concentrated on cash management while small firms were focused on stock management. Recently, many authors examine the effect of working capital management on the firm’s profitability. All the existing papers use data from the US (Filbeck and Kreuger, 2005) and Europe (Deloof 2003; Lazaridis and Tryfonidis, 2006 and Uyar, 2009).

As one observe, researchers have almost focused on developed countries from which lessons are not directly applicable to an emerging market economy. In fact, working capital management in these markets is different from the practices that have been used in developed ones. Therefore, the aim of this paper is to carry on working capital management debate with reference to an emerging market.

Keeping this in view, our study is the first attempt to identify the impact of working capital management on corporate profitability from a Tunisian dataset. In fact, the Tunisian capital market is not developed and small and medium companies suffer from credit rationing (Bellouma and al., 2009). Specially, they cannot access to the long-term capital markets and rely greatly on internal financing, trade credit and short-term bank loans.

Moreover, even if working capital concerns all businesses, it is more serious for small and medium sized exporting companies. This category must be able to face international changes and competition. Thus, the lack of timely and appropriate working capital presents not only additional costs but also an internal barrier for export activity.

In addition to this contribution of our paper, the econometric approach is based on the context of panel data analysis. Finally, our finding is helpful for practitioners and managers concerning daily operations and should give them more incentive to improve working capital efficiency.

The rest of the paper is organized as follows. Section 2 briefly provides the literature review and presents the hypothesis. Section 3 describes the methodology adopted. Section 4 exposes the findings. Finally, section 5 concludes.

Literature review and derivation of hypothesis

Working capital decision is time consuming, intermittent and recurring. More precisely, managers spend a substantial time on day-today working capital decisions. Its management depends on information production, transaction costs and resources available and varies across industries (Filbeck and al., 2007).

Particularly, as the firm grows it requires more devoted ability to liquidity management. In presence of information asymmetry problems, managers try to maximize their welfare at the expense of shareholders. In other words, they privilege liquidity accumulation instead of enhancing profitability. As illustrated by the adepts of agency theory, this opportunistic behavior implies managerial incentive problems and agency costs (Jensen and Meckling, 1976). It’s generated especially when firm ownership is separated from managerial decision-making (Westhead and al., 2001).

Generally, liquidity and profitability present the most important financial aspects of the corporate activity. The liquidity should be sufficient to face the problem of insolvency. In fact, excess of liquidity indicates inefficient funds. However, inadequate liquidity affects the production process of the company (Cooper, 2003 and Vishnani and Shah, 2007).

To survive for a longer period, firms have to maximize the profit which is at the cost of preserving liquidity (Kalcheva and Lins, 2007, Dittmar and Mahrt-Smith, 2007). Therefore, there must be a trade off between liquidity and corporate profitability. The firm’s profit basically depends on the level of sales which can’t be translated instantly into cash. To face this time lag and to sustain sales activity (purchase the materials, pay expenses…), firms require working capital. Thus, working capital management presents an essential way to ameliorate the performance of a corporate entity.

From an empirical view, Eljelly (2004) considers that planning the level of current assets and current liabilities avoids the firm excessive short – lived investments. Besides, it neutralizes the risk of incapacity to pay obligations on a timely basis. On a sample of joint stock companies in Saudi Arabia, he found a negative relationship between profitability and liquidity. In the context of Indian pharmaceutical industry, Amit and al. (2005) note that no relationship can be established between liquidity and profitability.

This discussion yields the following hypothesis:

H1: There is a probable positive relationship between the ability of small and medium Tunisian export companies to generate liquidity and their profitability.

The adepts of resource-based view suggest that firms manage their working capital differently. Firms invest resources to enhance their returns and cover transaction costs. Accordingly to this idea, Howorth and Westhead (2003) note that investment in working capital management is linked to the return perceived.

Information asymmetry and underwriting fees are the basic element to consider when the firm has to choice between costs of internal and external funds (Myers and Majluf, 1984). Based on trade credit theory, suppliers collect additional information over traditional financing channels. This cost advantage makes trade credit a cheaper substitute to bank credit (Petersen and Rajan, 1997). Conversely, at the same time, trade credit deprives the firm of early payment discount and decreases the probability of receiving poor quality materials.

Deloof (2003) argues that optimal level of working capital will maximize the firm’s profit. Then, to attend this aim, the manager tries to find the optimal level of the working capital components (inventory, accounts payable and accounts receivables). When he adopts flexible trade credit policy and keeps large inventory, sales may increase (Long and al., 1993; Deloof and Jegers, 1996).

However, granting trade credit and maintaining inventories can be expensive due to the lock up of money in working capital (Guariglia and Mateut, 2006). By reducing their accounts receivable, firms limited sales by credits to their customers. Then, this strict collection policies and minimal inventory may lead to lost sales, stock-out and reduces the profits. Besides, by delaying payments to suppliers, the manager allows the firm to beneficiate from a flexible source of financing.

Evidence suggests that working capital management looks for creating a high quality accounts receivable portfolio in order to improve corporate value (Pike and Cheng, 2001). Deloof (2003) points that managers of Belgian firms can increase profitability and create value for their shareholders by reducing the period of turning raw materials into cash. He also found a significant negative relationship between gross operating income and the period that a company takes to receive payment on accounts receivable.

As shown by Ganesan (2007), efficient working capital management must provide an efficient mix between the firm’s working capital components to ensure capital adequacy. Thus, short inventory and receivable cycles combined with long payable cycle allow firms to rely less on external financial market. In fact, they may invest daily operation funds in growth projects.

Shin and Soenen (1998) reported a strong negative relation between a measure of the cash conversion cycle and corporate profitability for a large sample of listed American firms. They indicate that larger firms with liquidity problems focus on cash management while smaller firms try to manage their stock. In addition, Filbeck and al. (2007) find a positive relationship between the announcement effect of Fortune Magazine’s working capital ranking and the stock market response.

This discussion yields the following hypothesis:

H2: There is a probable positive relationship between the period that small and medium Tunisian companies take to pay off suppliers and their profitability.

H3: We expect that the period that small and medium Tunisian companies take to turn raw materials into cash is negatively associated with their profitability.

H4: We expect that the period that small and medium Tunisian companies take to receive payment from customers is negatively associated with their profitability.


The theoretical review and studies presented above give us results and conclusions on working capital management for different countries. In the next section, we expose the methodology conducted on the same area for small and medium Tunisian export companies.


The purpose of this study is to identify the effect of working capital management on profitability with reference to Tunisia. In this section, we present the companies included in the sample, the variables used and the statistical techniques applied in the investigation.

Data collection and sample characteristics

The data used in this research was acquired from Tunisian Export Promotion Center (CEPEX). The CEPEX is a governmental institution which provides assistance for small and medium export Tunisian companies in the private sector. Its principal aim is to promote the expansion and development of Tunisian exports. It’s responsible to support the small and medium Tunisian companies abroad by providing adequate information, organizing promotional activities and programs of meetings between potential partners. To make a more representative sample, we opted for the quota method. In selecting our sample, we tried to replicate some characteristics of the population of small and medium Tunisian export companies. The following table shows the distribution of firms by industry. The test of homogeneity allowed us to retain the null hypothesis that the population and the sample have homogeneous distribution among the five sectors of activity at the confidence level of 95%.


Insert table 1 about here


The data collected is based on financial statements of the small and medium Tunisian export companies operating in different sectors of the economy. We processed manually the yearly data of good sales’ costs, receivables, payables, inventory, and operating income.

The sample is composed by 386 SME. The period covered by the study starts from 2001 to 2008. Specifically, 136 companies work at the manufacturing sector, 96 have a construction activity, 24 run detail retail, 104 operate in whole sale trade and 22 in service sector. The panel is mainly composed of limited liability companies. During the period of the study, they present 67.8% of the companies included in the sample. The limited corporations represent only 32.2%.

The choice of small and medium export companies can be explained by the importance of working capital management for this category of businesses. They must be very competitive in order to face the new complexities of the international interface. In fact, foreign taxes and exchange rates, social, cultural, economic, and political factors are added in this case.

Variables of the analysis

In order to identify the influence of working capital management on small and medium export Tunisian company’s profitability, we retain this measure of the dependant variable:

GOPit: The corporate profitability is measured by the gross operating profit. It is calculated by subtracting cost of goods sold from total sales and divided by total assets minus financial assets (Deloof, 2003). Contrary to the use of earnings before interest tax depreciation and amortization like Ramachandran and Janakiraman (2009), we try to associate operating result with the operating variables relating to working capital management. Besides we want to separate the financial activity from operational activity that might affect overall profitability. Thus we deduct financial assets from total assets.

The independent variables included in the study concerning the capital working management are:

DSOit: The collection policy is reflected by the day’s sales outstanding and measured by [accounts receivable x 365]/sales. A low DSO shows that the company collects its accounts receivable in fewer days. A high DSO number means that a company sells its product to customers by credit (Petersen and Rajan, 1997). Firms may improve collection process by offering discounts to customer who reimburses earlier. Also they may charg interest for the one who pays later. As noted by Pike and Cheng (2001), a high quality portfolio of accounts receivable has significant implications for corporate value.

DIOit: The inventory policy revealed by the day’s inventory outstanding is measured as [inventories x 365]/cost of sales. When the company maintains an equilibrate level of inventories it can respond to higher demand. This can be improved by the inventory monitoring process and depends on the synchronization between raw materials delivery by suppliers and the need in the production process (Deloof, 2003). Thus the level of inventories will have an effect on profitability since it will liberate working capital resources to be invested in the business cycle (Lazaridis and Tryfonidis, 2006).

DPOit: The payment policy is measured by the day’s payable outstanding. It’s calculated as [accounts payable x 365]/purchases. Generally, slowing down reimbursement to suppliers helps the company in releasing additional resources and enhancing working capital management (Uyar, 2009). However, prompt payment of suppliers allows the company to receive a significant discount (Deloof, 2003).

CCCit: The cash conversion cycle presents the time lag between the costs of raw materials and the finished product sales. The cash conversion cycle is calculated by deducting the number of day’s accounts payable from [number of day’s accounts receivable + number of day’s inventory]. The efficient management of the cash may lead to extra money which can be invested in other projects and generate additional income. A short cash conversion cycle signifies adequate policies of maintaining inventory, collecting receivables and paying bills. This ameliorates the organization of internal operations of a company.

The other dependent variables included in the study are:

CRit: The current ratio is calculated by dividing current assets by current liabilities. Working capital management implies the determination of the amount and the composition of current assets and their financing. A high current ratio signifies an important investment in current assets which represents a low return on investment (Vishnani and Shah, 2007).

SIZEit: The size of the company is measured by the natural logarithm of sales in million Tunisian dinars (TND) (1USD = 1.3169 TND). Financial and organizational constraints faced by small companies may restrict their available resources to invest in working capital management (Howorth and al., 2003). Thus, larger companies are able to reduce cash gaps which may enhance their profitability (Raheman and Nasr, 2007).

DRit: The debt ratio is measured by dividing the sum of short term loans and long term loans by total assets. It presents the proportion of company’s debt relatively to its assets. It gives an idea about the leverage of the company and its potential risks. A high level of debt ratio indicates the low financial health of the company and its inability to rely on its internal funds (Bellouma and al., 2005). Therefore, company with important debt ratio is expected to have low level of profitability (Raheman and Nasr, 2007).

SECTRit: The sector is a dummy variable with five modalities: Sectr it 1 = equal to 1 if the company belongs to the manufacturing sector and 0 otherwise, Sectr it 2= 1 if it operates in construction sector and 0 otherwise, Sectr it 3 = 1 if it has a retail trade activity and 0 otherwise, Sectr it 1 = 4 if it work at whole sale trade and 0 otherwise and Sectr it 1 = 5 if it provides a service and 0 otherwise (this modality is eliminated from the estimation because it represents the reference modality). These sectors can influence the company decision concerning working capital management and practices. In fact, the current assets of a distribution company are very important compared to the manufacturing company (Deloof, 2003). Besides, the economic environment (the production factors, the production process, supply and demand, taxes, interest rate…) differently influence the profitability of the company according to the sector in which it operates.

Data analysis and results

To understand the relevant aspects of working capital management, we conduct a descriptive analysis. Table 2 reports the average, the standard deviation, the minimum and maximum values of the variables included in the study.


Insert table 2 about here


The mean value of gross operating profitability is 13.8%. For the sample retained, the value of the profitability can deviate from the mean by 1.3%. The minimum gross operating profitability is 10.51% while the maximum is 17.75%. As we observe, all the companies of the sample have a positive profitability and is interesting to see whether this characteristic is due to the working capital management practices.

The cash conversion cycle appears sometimes negative and sometimes positive (the minimum is -52 days and the maximum is 397 days). To be efficient, the company must have the low cash conversion cycle and if possible negative. A positive result shows the number of days a company must wait to be paid by its customers. A negative result indicates the number of days a company has before paying its suppliers. Thus, exporters may spend ample time and effort to search partners in the target market. They have to build relationships in foreign markets and to reinforce them.

In our sample, firms collect their cash from receivables after an average of 100 days with standard deviation of 41 days and a minimum of 16 days. Besides, they pay their purchases after an average of 98 with a deviation of 38 days and a minimum of 26 days. They take an average 79 days to convert inventory into sales with a deviation of 21 days and a minimum of 32 days.

The mean value of the company size is 0.88 with a standard deviation of 0.49. The minimum value is -0.41 and the maximum value is 2.33. The descriptive statistics of the size measured by the natural log of sales indicate that the companies included in the panel are small and medium.

The average current ratio of Tunisian companies is 0.22 and divert from this mean value to both sides by 0.006. The lowest current ratio for a company is 0.04 times. The average of debt ratio is 38.28% with a standard deviation of 13.5%. The minimum level of debt is 10% which explains the incapacity of small companies to access to external financing but can also reflect their repugnance to rely on bank credit.

After presenting the descriptive statistics of the variables considered in the analysis, we measure the degree of association between them. Pearson’s correlation analysis allows us to identify the relationship between working capital management and profitability.


Insert table 3 about here


As we see in table 3, there is a negative relationship between gross operating profitability and the cash conversion cycle (-0.0382). This is consistent with the idea that the insufficient level of liquidity makes the export company unable to cover the costs supported. In this context, any liquidity shock on the foreign market will influence the exporting company abilities to face the competition. Thus, the decrease of the time lag between purchases expenses and the sales collection enhance the company’s profitability.

Correlation result indicates that cash flows locked in stock may adversely affect its profitability (-0.0408). By considering this finding, we conclude that Tunisian export companies can improve their profitability by reducing the period of selling their inventory. Exporting companies bear additional costs due to transport costs, foreign regulations or adoption of products. Therefore, these costs are one reason for maintaining an adequate stock to cover the eventual demand. Indeed, as pointed by Bougheas and al., (2009) corporate profitability might increase if the benefits of keeping low level of inventory rise faster than costs related.

The above result is coherent with the positive link between day’s inventory outstanding and the cash conversion cycle (0.4353). In other words, the export companies that turn their input to sales slowly have a long inventory cycle. Thus, they must cover this cycle by additional funds which explain the deterioration of their profitability.

In addition to that, Pearson’s correlation presents a significant positive relationship between the day’s sales outstanding and the cash conversion cycle (0.5927). This means that small and medium Tunisian export companies offer to their customers more time to assess the quality of their products because of the competitive international environment. Thus, spending more time to collect cash will increase the days of working capital.

The debt ratio appears positively linked to the profitability. This result let us suggest that levered companies are more efficient. Indeed, to accede to external credit companies acquire a healthy financial situation. The monitoring exerted by stakeholders may improve the efficiency of the companies due to their capacity of collecting information and minimizing adverse selection and moral hazard problems (Bellouma and omri, 2008). Besides, facilities provided by Tunisian commercial banks allow exporters suffering from internal liquidity to fulfill orders.

The increase of the size improves the profitability of the company. This may be explained by the information opacity of small companies and their informal management. Thus, large exporters are able to stabilize the cash flow problems and to grow competitively in the foreign market.

In order to capture the impact of working capital management on small and medium Tunisian export companies’ profitability, we use a regression analysis on panel data. Contrary to cross section or time series data, panel data allows us to detect dynamics effects of working capital management on profitability. Particularly, we estimate the determinants of corporate profitability by general least squares method to avoid heteroskedasticity problem observed in the pooled data. The model applied is as follows:

GOPit = a + b Xit + ∑ c Y it + εit

Where: GOPit: Gross Operating Profitability of company i at time t;

a : The intercept of equation

X it :The working capital Management variable of company i at time t. We introduce the four variables (DPO, DSO, DIO and CCC) one by one in order to identify their effects on corporate profitability.

b: : Coefficient of the working capital management variable

Y it :The variables included in the analysis

c: : Coefficient of the variables included in the analysis

i = 1, 2, …, 386

t : Time = 2001…..2008

ε : The error term


Insert table 4 about here


The results of the regressions for the whole sample are presented in table 4. The models are statically significant for the four specification retained (Wald Chi 2 is highly significant at level 1%). In the first regression, we find that day’s payables outstanding affect negatively the corporate profitability which is inconsistent with our second hypothesis.

This relationship between accounts payables and profitability can be explained by the fact that most profitable companies reimburse their bills quickly to beneficiate from the early payment discount. So, unprofitable small and medium export Tunisian companies postpone payment to suppliers since they generate less cash from their operation.

Thus, trade credit received from sellers represents a minor source of small and medium Tunisian export companies’ working capital financing. In the others regressions, the day’s sales outstanding, the day’s inventory outstanding and the cash conversion cycle aren’t significant.

To estimate the impact of the different working capital management components’, we run additional regressions by considering each sector separately.


Insert tables 5 and 8 about here


For the relationship between day’s payables outstanding and corporate profitability, a negative one is detected when we consider the manufacturing and whole sale trade sectors. As the entire sample, more profitable small and medium export Tunisian companies operating in manufacturing or whole sale trade settle payment to creditors in a short period. The higher days payable might also imply the inability of the supplier to offer credit.

Besides, we observe a positive link between the two variables for small and medium export Tunisian companies operating in construction, retail trade and service sectors. As an explanation, we suggest that late supplier’s payment may increase profitability since the company can use the funds in other investments. Accordingly to the transaction cost theory, small and medium Tunisian export companies may enhance their returns by investing adequately resources and cover their costs. Thus, the company creates a flexible source of financing by delaying payments to suppliers.


Insert tables 5 and 7 about here


As shown in table 5 and 7, number of day’s sales outstanding is positively linked the profitability of companies operating in manufacturing and retail trade. The sign of this relation is unexpected by our fourth hypothesis. It indicates that managers can improve profitability by increasing the credit period granted to their customers. This finding is consistent with the trade-credit theory which implies that companies offer larger trade credit as an instrument to boost future performance in general. In fact, for the sample considered, the small and medium Tunisian export companies have to be more competitive with foreign clients to attract them by offering a flexible collect policy.


Insert tables 6, 8 and 9 about here


However, in table 6, 8 and 9, we note that days sales outstanding are negatively connected to the corporate profitability for construction, whole sale trade and service sectors. This finding is consistent with our fourth hypothesis. It illustrates the profit generated by the small and medium Tunisian export companies when they transform their sales into cash in a short period.

In others words, high quality accounts receivable portfolio improves the corporate value of the export company. Thus, the small and medium Tunisian companies have to assess the foreign market by collecting sufficient information about the behavior of the customers. Indeed, export sales vary from domestic ones because of transactions with foreign agents, transport expenses and insurance costs.

In the table 6, we take the day’s inventory outstanding as an independent variable. The result indicates that maintaining a high level of inventory improve the profitability of small and medium Tunisian export construction companies. This finding is inconsistent with our third hypothesis. In fact, an important level of inventory allows construction companies to respond to unexpected export order at the relevant time without relying on additional funds.


Insert tables 7, 8 and 9 about here


Conversely, the third hypothesis is confirmed for small and medium Tunisian export companies operating in retail trade, whole sale trade and service sectors. Indeed, the significant negative relationship between day’s inventory outstanding and profitability let us suggesting that large stocks which cannot be converted quickly in sales decreases corporate profitability. Therefore, managers in retail trade, sale trade and service sectors can enhance the profitability of their companies by handling short inventory.


Insert tables 5 and 8 about here


The above discussion treats one by one the three comp


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