The Relationship between Working Capital Management and Profitability: Evidence from Turkey

Abstract

1. IntroductionWorking capital is a financial measure used to assess corporate liquidity (Naser et al., 2013). Working capital management is considered to be a vital issue in financial management decision and it has its effect on liquidity as well as on profitability of the firm. Moreover, an optimal working capital management positively contributes in creating firm value (Baghci and Khamrui, 2012). Most projects require the firm to invest in net working capital. The main components of net working capital are cash, inventory, receivables, and payables. It does not include excess cash, which is cash that is not required to run the business and can be invested at a market rate (Berk et al., 2008).The term working capital refers to the quantum of fund required to maintain day-to-day expenditure on operational activities of a business enterprise. It is actually required to run the wheels of the business (Mandal and Goswami, 2010). Working capital, in a financial statement context, means the current assets of a company. In turn, current assets are defined as assets expected to turn into cash within one year (Appuhami, 2008; Kaen, 1995). Working capital is needed for day-to-day operations of a firm (Napompech, 2012). The main objectives of working capital management are profitability and liquidity (Watson and Head, 2004). We can therefore be expected that the way in which working capital is managed will have a significant impact on the profitability of firms conducted by Deloof (2003). Accordingly, we focus on whether impact of working capital management under firms profitability outcomes of ISE.The management of working capital by managing the proportions of the working capital component is important to the financial position of business for all industries (Ganesan, 2007), because it directly affects the profitability of the firms. Working capital management, which consists of current assets and current liabilities management, is the main function of financial managers in all corporations (Mansoori and Muhammad, 2012; Ali and Ali, 2012). The management working capital may have both negative and positive impact of the firm's profitability, which turn, has negative and positive impact on the shareholders' wealth (Gill et al., 2010). Good working capital management is central to a firm's profitability and profitability is essential for firm's ability to pay dividends to shareholders (Oladipupo and Okafar, 2013). Effective working capital management lies on successful company, playing a important role in the increase of shareholder wealth. Likewise, good working capital management is one of the more common reasons for corporate successful.The main objective of working capital is to ensure that firms have sufficient cash flow to continue normal operations in such a way that minimize risk of inability to pay short-term commitment. Moreover, managers should try to avoid from necessary investment in working capital. While more investment in working capital may reduce the risk of liquidity, insufficient amount of working capital may cause shortages and problems in daily operations (Mansoori and Muhammad, 2012). Working capital decisions provide a classic example of the risk- return nature of financial decision making. Increasing a firm's net working capital, current assets less current liabilities, reduces the risk of a firm not being able to pay its bills on time (Barine, 2012).The estimation of working capital of a firm is a difficult task for management because of its varying characteristics in a dynamic operating environment. It actually varies across the companies in an industry as well as over the period under considerations for a particular firm (Mandal and Goswami, 2010).The utmost important components of working capital related to inventories, accounts receivables and accounts payables (Ross et al., 2002). One important current asset is accounts receivable. When one firm sells goods to another firm, it does not expect to be paid immediately. …