Exploring factors affecting profitability in SME: Evidence from Albania

Abstract

Companies who operate in bank based financial system countries tend to be more sensitive to working capital management. In this context working capital takes a special attention from academic point of view and economic stability as well of the private companies. That’s the reason why we develop this study since 90% of the companies which operate in Albania are classified as SME. According to literature review profitability is a wide concept since it can be expressed as an accounting measure, usually ROA. In this study we refer to the accounting measure ROE and it is considered our dependent variable. Independent variables are classified in two groups: internal indicators and external indicators. Internal variables are: Working capital measures, size of the company, sales growth, financial leverage. The country specific variables are: GDP growth, Ease of doing business.Working capital represented by CCC has an insignificant relationship to company profitability, but variables like Days Acc. Receiv and Days Invent. seem to have a significant impact. Size seems to not have any significant effect on profitability, perhaps the reason behind this is that these are all SME and their size does not differ regarding to profitability. While sales growth and has a significant positive relationship. Sales growth increases the profitability while leverage decreases it. Also the indicators of total asset turnover and acc. receivable turnover have a significant positive impact on profitability. What about country specific? Since GDP growth represents the economy cycle, it should have a positive significant relationship to profitability, but in our study the country specific indicators does not have any significant impact.