An Examination of Working Capital Management and Its Effect on SME Profitability in Nigeria: A Case Study of SMEs in Anambra State
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Background of the Study
Working capital management is a fundamental aspect of financial management that directly impacts the profitability and operational efficiency of small and medium-sized enterprises (SMEs). It involves managing current assets and liabilities to ensure optimal liquidity and financial health (Eze & Nwankwo, 2024). For SMEs in Anambra State, effective working capital management is crucial to navigate challenges such as fluctuating market conditions, high operating costs, and limited financial resources.
Anambra State is a key commercial hub in Nigeria, with a vibrant SME sector spanning various industries. However, many SMEs in the region face difficulties in maintaining an appropriate balance between current assets and liabilities, leading to liquidity crises and reduced profitability. Challenges such as poor inventory management, delayed receivables, and high borrowing costs are common among SMEs in the state (Chukwuma & Okafor, 2023). These issues highlight the need for a comprehensive examination of working capital management practices and their impact on SME profitability.
Studies show that effective working capital management can significantly enhance profitability and operational efficiency in SMEs (Adebisi & Onyekachi, 2025). However, there is limited research focusing specifically on Anambra State SMEs, making it essential to bridge this gap and provide actionable recommendations for improving working capital practices.
Statement of the Problem
Despite the critical role of working capital management in enhancing profitability, many SMEs in Anambra State struggle with poor financial planning and inefficient asset management. These issues often result in liquidity challenges, delayed operations, and reduced profitability. While existing research highlights the importance of working capital management, there is a lack of focused studies on its specific impact on SME profitability in Anambra State. Addressing this gap is vital for improving the financial performance and sustainability of SMEs in the region.
Objectives of the Study
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To evaluate the current working capital management practices of SMEs in Anambra State.
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To analyze the relationship between working capital management and profitability in SMEs.
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To propose strategies for optimizing working capital management to enhance SME profitability.
Research Questions
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What are the current working capital management practices of SMEs in Anambra State?
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How does working capital management impact SME profitability in Anambra State?
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What strategies can improve working capital management practices in SMEs?
Research Hypotheses
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H₀: There is no significant relationship between working capital management and SME profitability in Anambra State.
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H₀: Inventory management does not significantly affect the financial performance of SMEs.
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H₀: Delayed receivables do not significantly influence the profitability of SMEs.
Scope and Limitations of the Study
This study is limited to SMEs in Anambra State, with a specific focus on their working capital management practices. The study does not cover larger corporations or other states in Nigeria. Limitations include potential challenges in accessing accurate financial data from SMEs and the influence of external economic factors not accounted for in the study.
Definitions of Terms
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Working Capital Management: The process of managing short-term assets and liabilities to ensure liquidity and operational efficiency.
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Profitability: The ability of a business to generate profit from its operations.
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Liquidity: The availability of cash or assets that can be quickly converted to cash to meet short-term obligations.
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SMEs: Small and medium-sized enterprises, typically employing fewer than 200 people in Nigeria.
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