Analysis of Working Capital Structure and Financing Pattern of Mauritian Small Manufacturing Firms

The competitive nature of the business environment requires firms to adjust their strategies and adopt good financial policies to survive and sustain growth. Managing working capital is problematic for the small business firms as they hardly adopt best practices unlike their larger counterparts. This paper, therefore, examines the structural differences in working capital and the financing pattern of 58 small manufacturing firms, operating in five industry groups for the period 1998-2003. An analysis of working capital components and funding pattern shows significant structural changes. While the stocks level and trade debtors have not experienced any major variations, yet they account for 80% of the short-term resources tied up in working capital. Thus, the working capital position of the sample firms reveals disproportionate increase in current asset investment in relation to sales resulting in a sharp decline in the working capital turnover. The mean value is three times, indicating a lower operational efficiency. The study also shows an increasing trend in the short-term component of working capital financing. While the short-term funds, in particular trade credit and other payables, have financed the major part of the working capital, the percentage of long-term funds used to finance the working capital has declined consistently during the same period. This over-concentration on short-term funds is a reality of the SMEs as they often faced difficulties in raising finance to support their business activities.