Abstract
This study examines the effect of the Working Capital Management (WCM), its elements, Cash Conversion Cycle (CCC), and liquidity, on the Chinese SMEs Financial Performance (FP) in the FMCG industry. Based on a quantitative, cross-sectional survey-based design, data were collected through 320 finance professionals in SMEs listed in the Shanghai and Shenzhen stock exchanges, and major companies of the private sector. The key variables, including inventory, receivables, payables, CCC, liquidity, return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), and Digital Finance Adoption (DFA), were measured with the help of the 7-point Likert scales with a high level of validity. Data was analyzed using SPSS and R, which have Confirmatory Factor Analysis (CFA) and Structural Equation Modeling (SEM), to evaluate reliability, validity, and hypothesized relationships. The findings demonstrate that effective WCM practices lead to a tremendous improvement in SME financial performance, where liquidity presents the most significant impact (β = 0.62, p < 0.01). Moreover, DFA further enhances the positive relationship between WCM and financial performance. The reliability and robustness of the findings were validated by robustness tests such as multi-collinearity, endogeneity, heteroskedasticity test, and bootstrapping. Multi-group analyses revealed a uniformity in the findings of the different firms in terms of size and geographical coverage. The study provides a theoretical contribution by combining WCM and DFA in the context of SMEs and also gives practical suggestions that can be offered by managers and policymakers to maximize liquidity and enhance operational efficiency.