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Working capital, cash flow and profitability of intensive MSMEs: evidence from Ecuador

Abstract:

Purpose: The purpose of this research is to examine Micro-, small- and medium-sized enterprises (MSMEs). Which have limited access to financial resources from financial intermediaries. Thus, resource allocation is a primary concern for them. Design/methodology/approach: This research studies the determinants of cash conversion cycle components and cash flow of MSMEs operating in Ecuador. This study examined a robust sample of 19,680 firms from 2000 to 2020, using the two-step generalized methods of moments to control for endogeneity and multicollinearity of independent variables issues. Findings: The sample was divided into working capital intensive and fixed capital intensive firms. It was found that in every segment (micro-, small- and medium-sized), the majority of firms are working capital intensive and their average return is higher. This implies that small business owners assign the majority of their resources to current assets, which thus far have enabled them to achieve higher profitability. Originality/value: Research investigated Ecuadorian MSMEs in a dollarized developing environment. Scrutinizing working capital intensive vs fixed capital intensive.