Working Capital Management Practices and Financial Performance: Evidence from Serbia

Abstract

In the last decade, special attention has been paid to the issue of working capital management. Evidently, many authors suggest that the optimum level of working capital depends on the industry and the nature of its transactions (Walker, 1964; Outram, 1997, Ozbayrak and Akgun, 2006). According to Johnson and Soenen (2003), in order for a company to be able to achieve its aim of shareholder value creation, effective working capital management should be an integral part of its corporate strategy. Net working capital is defined as the difference between firms’ current assets (including accounts receivable, inventories, and cash) and current liabilities (including accounts payable and short term debt). These elements significantly influence company’s liquidity and that is the reason why working capital is often used to evaluate the liquidity of a company. The relevance of this performance measure arises from the fact that the insufficient liquidity of the company can lead to its bankruptcy (Dunn and Cheatham, 1993).