THE IMPACT OF WORKING CAPITAL MANAGEMENT ON THE PROFITABILITY OF FIRMS IN SELECTED INDUSTRIES IN THE REPUBLIC OF CROATIA

The aim of the paper is to detect the impact of working capital management (WCM) on the profitability of Croatian firms which belong to manufacturing, trade, and information and communication industries. The time frame of interest is from 2008 to 2015, and the final sample consists of 19.355 firms, i.e. 116.002 firm-year observations. The data sources are the databases of the Financial Agency and Croatian Bureau of Statistics. In order to test research hypothesis, among other methods, panel regression analysis is used. The study results show that, after controlling for firm characteristics and macroeconomic conditions, aggressive WCM has a significantly positive effect on the profitability of small firms from selected industries and for medium-sized manufacturing firms. Moreover, the results imply the existence of a significantly convex quadratic dependence and overall downward trend, marked by the increasing marginal returns of profitability with the extension of working capital cycles. The latter indicates that a more aggressive strategy significantly increases the profitability of firms at increasing rate. In other words, the managers of those firms should strive to shorten the working capital cycles in order to increase profitability. The limitations of the research are: the impossibility of spatial and temporal generalization of identified results, limited possibility of explaining identified directions and the significance of the influence of observed indicators of variables, as well as detection of reasons for agreement or contradiction with previous research results, unavailability of certain data, and omission of potentially significant variables and/or their alternative indicators. Scientific contribution can be summarized as follows: a comprehensive and systematic review of previous research; in addition to dominant linear impact testing, testing of nonlinear quadratic relation between the observed variables, which, is beginning to appear in the relevant literature and, accordingly, is generally poorly represented in all the previous studies, and has not been conducted in the Republic of Croatia; respectable spatial and temporal coverage; the expansion of coverage from listed and large firms to private firms and small and medium-sized firms.