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The impact of working capital management on profitability of small and medium sized business units
Nowadays, the application of financial management topics has gained a special place in the enhancement of the
efficiency of an organization. Hence, making financing and investment decisions as the two main responsibility
of financial mangers is of great importance. To this end, working capital management, that is, management of
resources and current expenses, has gained a great deal of importance for maximizing shareholders’ wealth as a
part of The area of financial management topics (Rahman & Nasr, 2007). Mangers of units for profit in different
situations considering the internal and external factors and also considering risk and return should select a proper
strategy for managing the working capital of their unit. If the strategy type of the management of current assets
and liabilities is selected properly in a given time, it will make possible the achievement of the best working
capital management strategy (Michalski, 2003). Striking a balance in current assets and current liabilities is of
great importance, in a way that decision-making about one will affect the other greatly (Jahankhani & Talebi,
In managing affairs related to working capital of a business unit, there are various strategies, resulting from
combining current assets strategy and current liabilities strategy (Reymond, 2001). Working capital management
of a business unit in different conditions should select appropriate strategies for a company so that it can manage
www.ccsenet.org/ass Asian Social Science Vol. 11, No. 23; 2015
current assets and liabilities efficiently. Currently, most of those who are involved in industries of our country
have understood the importance of working capital, however, they are still searching more for external and
temporary solutions for solving the existing problems. In other words, they see the solution in granting cheap and
sufficient loans to companies, while, with making a proper use of working capital and making the corresponding
policies, with the help of internal solutions liquidity can be improved and initial capitals can be supported
(Rahnamay-e Roudposhti & Kiaee, 2009).
On the other hand, with the separation of management from ownership and following that, with the emergence of
agency theory, performance evaluation has been raised as one of the most important topics in accounting.
Evaluation and performance of companies have always attracted the attention of shareholders, investors,
financial creditors, such as banks and financial institutes, Creditors and specially managers (Mahdavi &
Ghorbani, 2012). One of the effective factors on performance evaluation criteria is working capital strategies.
In the presents study, the effect of working capital strategies on performance evaluation criteria in Tehran Stock
Exchange has been explores and results indicate that investment strategies have a significant effect on return on
assets and Q Tobin indicator, however, they don’t have any significant effect on market value added. Financing
strategies, also are only having a significant effect on return on assets.
Based on the obtained results from the present research, the following recommendations are presented:
Considering the effect of investment strategies on return on assets and Q Tobin indicator, companies in this study
are recommended to increase their return on investment to some extent with selecting aggressive strategies,
although it should be noted that aggressive working capital strategies at the same time increases the risk of
default and companies should make their working capital strategies in a way to strike a balance in risk and return
which is the foundation of all financial decisions.
Considering the effect of financing strategies on return on assets, companies in this study are recommended to
establish and apply appropriate strategies with regards to financing method and current liabilities management in
order to reduce their Cost of debt and make use of financial leverages. As an example, diversification of
financing methods and the use of methods such as credit in current account, issuing bonds and moving toward
using securities for supporting mortgage can be mentioned.
For a larger effect of working capital management strategies on the performance of companies, it is
recommended that companies considering the General atmosphere of the industry they are working in, make
some initiatives in some areas such as pricing of products, responding to potential demands and consideration of
similar industries, which in turn require strategic and long-term planning in these companies.
Dong, H. P., & Su, J. (2010). The Relationship between Working Capital Management and Profitability: A
Vietnam Case. International Research Journal