THE IMPACT OF WORKING CAPITAL MANAGEMENT ON SMES FINANCIAL PERFORMANCE WITH MODERATED MEDIATION MODEL

Abstract

Small and medium-sized enterprises (SMEs) are important for economic development, job creation, and industrialization. In spite of all their importance, there is no denying that some SMEs suffer from financial problems which may affect their performance and sustainability. This paper focuses on the effect of cash management and accounts receivable management, both of which fall under the broader scope of working capital management, on SME performance. Also, it seeks to find out how financial flexibility acts as a mediator between the two independent variables mentioned above and performance as well as how firm size may moderate those relationships. Panel data of firms listed at Pakistan Stock Exchange from 2010-2023 have been utilized using Fixed Effects, Random Effects, and System GMM techniques. The findings reveal that cash management and accounts receivable management have significant positive effects on SME performance. Financial flexibility also demonstrates a strong positive influence on performance and significantly mediates the relationships between working capital management practices and SME performance. In addition, the moderation analysis indicates that firm size strengthens the positive effects of financial management practices on performance, suggesting that larger SMEs are better positioned to convert financial resources into superior organizational outcomes. The results remain robust across alternative estimation techniques, including System GMM, which addresses potential endogeneity concerns. This study contributes to the working capital management literature by uncovering the underlying mechanism through which financial management practices enhance firm performance and by highlighting the contingent role of firm size. The findings offer valuable implications for SME managers, policymakers, and financial institutions seeking to improve financial resilience, operational efficiency, and sustainable business growth in emerging economies.