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American Interdisciplinary Journal of Business 

and Economics 
ISSN: 2837-1909| Impact Factor : 4.6 

Volume. 9, Number 3; July-Sept, 2022; 

Published By: Scientific and Academic Development Institute (SADI) 

8933 Willis Ave Los Angeles, California 

https://sadipub.com/Journals/index.php/aijbe 

 

 

1 
American Interdisciplinary Journal of Business and Economics | 

https://sadipub.com/Journals/index.php/aijbe 
 

INVESTIGATING THE FACTORS INFLUENCING WORKING 

CAPITAL AND PROFITABILITY IN CHILEAN SMES: A STATISTICAL 

ANALYSIS 

 

 

 

Santiago Chalmers 

Department of Management and Innovation Systems, University of Salerno 

Abstract: This study investigates the relationship between working capital and profitability of Chilean 

companies. A sample of manufacturing companies from the metropolitan region of Santiago was selected for 

the survey. The data covered five years to allow a sufficiently significant observation time horizon. The 

generalised least squares method was used to develop the analysis to obtain more reliable results. The 

empirical results suggest that the relationship between the single elements of working capital and firms' 

profitability presents a non-linear trend, confirming the results obtained in previous research. Therefore, for 

Chilean manufacturing companies, it is worth investing in the individual elements of working capital until the 

optimal size is reached, as the investment positively impacts profitability. After exceeding the optimal 

threshold, the ratio reverses, increasing the risks of financial difficulties. 

Keywords: working capital, profitability, manufacturing companies, Chile, non-linear trend, financial 

difficulties. 

 

INTRODUCTION 

The management of working capital (WCM) has become increasingly important for companies of all sizes 

due to the various crises of a financial and non-financial nature that have occurred globally in recent decades. 

The short-term financial equilibrium can affect the medium and long-term financial management and 

economic stability, affecting the firm's ability to survive. In the context briefly outlined, the management 

policy of each component of working capital determines an impact on short-term financial flows, affecting - 

at the same time - the future economic-financial equilibrium. 

The literature has extensively studied the issue of working capital management. However, scholars have 

focused mainly on companies in developed economies. Over the last decade, the literature has shifted the 

focus on companies in emerging economies. Therefore, studies on working capital management in SMEs in 

emerging economies deserve attention from researchers. Furthermore, the SMEs of these economies often 

represent the backbone of the country's economic and social development, making a significant contribution 

to employment and GDP. 

 

In the context outlined, this research analyses the relationship between the determinants of working capital 

and profitability in the context of Chilean SMEs to enrich the literature on the subject and provide helpful 



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information to the managers of these companies. The paper is organised as follows. The second section 

develops the literature review. The third section illustrates the research methodology, while the next section 

highlights and analyses the results. Finally, the last section contains the concluding remarks.  

1. LITERATURE REVIEW  

The general business and financial literature investigating the relationship between working capital and 

business performance are extensive (Fazzari and Petersen, 1993; Deloof, 2003; Filbeck and Krueger, 2005; 

Gill et al., 2010; Bagchi and Khamrui, 2012; Sensini, 2020; Chalmers et al., 2020; Hernandez et al., 2021).  

The researchers focused their attention on different aspects in different economic contexts, depending on 

the research perspective sought. However, the prevailing literature has highlighted the need to focus 

attention on its determinants, namely liquidity, credits, inventories and debts (Chen et al., 2014; Sanchez 

and Sensini, 2017; Mannetta et al., 2013; Kumar and Sun, 2022).   

The management of these variables affects the short-term financial equilibrium, also affecting the future 

survival prospects of the company.  

In any case, the efficient and effective management of working capital requires that current assets content 

the company with sufficient cash flows to pay short-term debts, aiming to optimise the relationship between 

risk and profitability (Mannetta, 2014; Chalmers et al., 2020).   

Any choice regarding any variable of working capital necessarily impacts all the others, influencing the 

financial and economic dimension of the company and, therefore, the risk of financial difficulties and, more 

generally, the business risk (Sen and Oruc, 2009; Alipour, 2011; Alvarez et al., 2021).  

Increasing sales through a longer extension to customers can help increase turnover and profitability. 

However, the possible consequences of this expansionary policy must also be carefully considered. 

Extending customer collection times can cause economic tensions if actions are not taken to balance the 

extension of the entry financial cycle. Furthermore, the shift in sales collection times can lead to an increase 

in the level of risk due to possible financial difficulties for customers (Mannetta et al., 2013; Sensini, 2016; 

Diaz and Vazquez, 2019; Shan et al., 2019; Chalmers and Diaz, 2022; Kumar and Sun, 2022).  

This reasoning can also be extended to the other components of working capital. For example, warehouse 

management policies, which represent the link between production and sales (Sensini, 2020), also 

significantly impact the company's financial flows. Consequently, the choice of greater or lesser supplies 

in specific periods and the stock management policy must be carefully considered.  

Likewise, debt management deserves the same attention. The extension of the payment time of debts, if on 

the hand it can favour the availability of more significant financial resources in the short term; on the other 

hand, it can worsen relations with suppliers (Campos et al., 2014; Chalmers et al., 2014; Chen et al., 2014; 

Chalmers and Diaz, 2022).  

Concerning each of the working capital variables mentioned, the literature has often found conflicting 

results. The company's size, the different economic contexts, and the different survey perspectives used 

from time to time are the cause of these divergences in the corporate and financial literature.  

In this regard, scholars have suggested that negative, positive and non-linear relationships can emerge 

between the individual determinants of working capital and profitability.  

In particular, some authors have suggested a negative relationship between the Cash Conversion Cycle 

(CCC) and profitability, measured by ROA and ROE, also finding a negative relationship between the CCC 

and the other determinants of working capital. (Wang, 2002; Nobanee et al., 2011; Tauringana and Afrifa, 

2013; Ching et al., 2011; Mannetta and Zhang, 2014: Chalmers and Diaz, 2022).  

Other studies have suggested a positive relationship between working capital management and corporate 

profitability (Gill et al., 2010; Sharma and Kumar, 2011).  



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Finally, other studies have highlighted a non-linear relationship between the determinants of working 

capital and profitability, suggesting identifying an optimal level of working capital (Diaz and Vazquez, 

2019).  

2. RESEARCH METHODOLOGY  

To achieve our research objectives, we have selected a sample of manufacturing companies with registered 

offices in the metropolitan region of Santiago. We have chosen this region because it is the most 

representative of the economic and social dimensions of the country. The sample was drawn with a random 

sampling technique. Overall, 200 manufacturing companies were selected. The data was collected through 

a questionnaire to gather the financial information necessary to calculate the individual components of 

working capital. The survey refers to 5 years and covers the years from 2015 to 2019.  

A total of 120 companies participated in the survey. This level of participation can be considered 

satisfactory.  

Table 1 shows how we determined the individual variables under investigation.  

Tab. 1 –Variables of interest  

Dependent Variable      

Profitability  ROA  Net income/Average Total Assets  

Independent Variables      

Inventory  INV  Log (Average ages of inventories x 365/Cost)  

Account Receivables  AR  Log (AR x 365/Turnover)  

Account Payables  AP  Log (AP x 365/Cost)  

Cash Conversion Cycle  CCC  Log (INV + AR) - AP  

Control Variables      

Current Ratio  CR  Total Current Assets/ Total Current Liabilities  

Assets Turnover Ratio  ATR  Total Fixed Assets/Total Assets  

We developed the research using two different models.  

The first model (1) was developed to investigate the influence of every single element of working capital 

on profitability.  

The model assumes the individual determinants as independent variables and profitability as a dependent 

variable, as highlighted below:  

  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐼𝑁𝑉!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (1a)  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐴𝑅!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (1b)  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐴𝑃!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (1c)  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐶𝐶𝐶!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (1d)  

  

The model just highlighted (1) allows us to identify only linear relationships between the individual 

elements of working capital and profitability. Therefore, we have developed a second model (2) to verify 

whether there are non-linear relationships between the variables under study.  

The second model (2) uses a quadratic relationship and is highlighted below:  

  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐼𝑁𝑉!" + 𝛽%𝐼𝑁𝑉(2)!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (2a)  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐴𝑅!+ 𝛽%𝐴𝑅(2)!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (2b)  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐴𝑃!+ 𝛽%𝐴𝑃(2)!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (2c)  

𝑅𝑂𝐴!" = 𝛽# + 𝛽$𝐶𝐶𝐶!+ 𝛽%𝐶𝐶𝐶(2)!" + 𝑎%𝐶𝑅!" + 𝑎&𝐴𝑇𝑅!"+𝜖!"  (2d)  

  



Santiago Chalmers (2022)  
 

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The analysis was developed with the generalised least squares method. We have chosen this set because 

this method gives more reliable results.  

Table 2 shows the results derived from this method.  

Table 2 – Descriptive statistics  

Variables  Mean  Std. Dev.  Min  Max  

ROA  0.063  0.079  -0.194  0.384  

INV  4.175  1.876  -4.437  6.163  

AR  4.356  1.212  1.243  7.571  

AP  3.436  1.131  -3.918  5.918  

CCC  4.987  1.154  -3.363  7.633  

CR  2.108  1.901  0.345  14.845  

ATR  0.211  0.223  0.001  0.959  

Next, we developed the correlation analysis. As is 

evident from table 3, there are no multicollinearity  

  

problems; therefore, the results are reliable.  

  

Table 3 –  Correlation matrix  

  

   ROA  INV  AR  AP  CCC  CR  ATR  

 ROA  1  

 INV  -0.231  

  

1  

  

  

  

  

  

  

    

    

 AR  -0.310  0.235  1          

 AP  -0.291  0.291  0.475  1        

 CR  0.291  -0,121  -0.041  -0.027  0.027   1    

 ATR  0.049  -0.257  -0.291  -0.012  0.031  -0.141  1  

3. RESEARCH RESULTS AND DISCUSSION  

After verifying the results of the descriptive statistics and their reliability, in this section, we first developed 

the first regression model 1.   

The results of the first regression model are highlighted in Table 4.  

Table 4 – Model 1  

Variables  1a  1b  1c  1d  

INV  -0.00459***  -  -  -  

AR  -  -0.0194***  -  -  

AP  -  -  -0.0919***  -  

CCC  -  -  -  -0.0136***  

CR  0.00155***  0.00185***  0.00009  0.00217***  

ATR  0.00000  -0.0218***  0.0007  0.0221***  

C  0.0343**  0.0843***  0.0431***  0.0618***  

Significance levels: * < 0.05; **p < 0.01; ***p < 0.001.  

The results showed that the individual determinants and working capital have a negative and significant 

impact (1%) on the profitability of companies. In this regard, the Cash Conversion Cycle suggests that 

companies that manage to reduce working capital management times perform better than other companies. 

These results are consistent with those obtained in previous studies (Wang, 2002; Dang and Tran, 2019).  

In line with the chosen research methodology, we subsequently developed model 2 to verify the presence of 

any non-linear relationships between the elements of working capital and the performance of companies. The 

results of the first regression model are highlighted in Table 5.  



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Table 5 – Model 2  

Variables  2a  2b  2c  2d  

INV  0.00116**  -  -  -  

INV(2)  -0.00693***  -  -  -  

AR  -  0.0137***  -  -  

AR (2)  -  -0.0371***  -  -  

AP  -  -  0.00583***  -  

AP (2)  -  -  -0.00251***  -  

CCC  -  -  -  0.0119***  

CCC(2)  -  -  -  -0.00289***  

CR  0.00169***  0.00187***  -0.00105**  0.00229***  

ATR  -0.00579  -0.0235***  -0.00541  -0.0267***  

C  0.0231  0.0122  0.0251  -0.00493  

Significance levels: * < 0.05; **p < 0.01; ***p < 0.001.  

The quadratic variables of the model show a non-linear relationship between the individual components of 

working capital and profitability. This circumstance indicates that an investment in working capital 

produces a positive effect until the optimal level is reached, which corresponds to the curvature point 

evaluated at –β1 / 2β2. After exceeding this level, the investment in working capital produces an opposite 

effect, negatively affecting the performance of the firm.  

Therefore, the results suggest that expansionary policies produce positive effects until working capital 

reaches its optimal size. After this threshold, investments in current assets negatively affect company 

performance, leading to an increase in costs and greater sensitivity to risk. (Peterson and Rajan, 1997; 

Emery, 1984; Kim & Chung, 1990; Amendola et al., 2020).  

4. CONCLUDING REMARKS  

This paper aimed to investigate the relationships between working capital, its components and the 

profitability of companies, taking as a study reference the business context of an emerging economy, such 

as the Chilean one.  

To carry out the survey, we selected a sample of manufacturing companies from the metropolitan region of 

Santiago, the liveliest area of the country, from both an economic and social point of view.  

The data covered five years to allow a sufficiently significant observation time horizon. We used the 

generalised least squares method to develop the analysis. This method has the advantage of obtaining more 

reliable results than other methodologies.  

The empirical results suggest that the relationship between the single elements of working capital and firms' 

profitability presents a non-linear trend, confirming the results obtained in previous research.  

Therefore, it is worthwhile for Chilean manufacturing companies to invest in the individual elements of 

working capital until the optimal size is reached, as the investment positively affects profitability. After 

exceeding the optimal threshold, the relationship is reversed, leading to an increase in the risks of financial 

difficulties.  

The results of this research contribute first to enriching the existing literature, broadening the view on the 

companies of an emerging economy that is still little studied.  

Furthermore, the results can provide helpful food for thought for business managers, helping guide their 

management choices.  

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