Changes in Working Capital of Small Firms in Relation to Changes in Economic Activity

This paper studies how the working capital position of small firms responds to changes in the level of economic activity. Fifty small firms were studied for the time period 1980‐1991. The findings from this study showed that liquidity increased slightly for these firms during economic expansion with no noticeable change in liquidity during economic slowdowns. Their investment in working capital, as measured by the inventory to total assets and current assets to total assets ratios, were relatively stable over the time period of this study.Findings suggest that working capital management practices of small firms in response to changes in economic activity do not follow commonly held expectations.