An Investigation of the Association between Working Capital Management and Corporate Performance

Working capital management is an essential part of the short-term finance of a firm. With an efficient working capital management, a firm can release capital for more strategic objectives, reduce the financial costs, and improve profitability. The present research studies the relationship of working capital management on performance of firms Listed in Tehran Stock Exchange (TSE). Average Collection Period, Inventory Turnover in days, Average Payment Period, Cash Conversion Cycle, and Net Trading Cycle were used to assess working capital management, and Net Operating Profitability was used to assess firms performance. The findings of studying 50 firms during the period between 2006 and 2009 by using an Ordinary Least Square Method (OLS) showed that there would be a negative and significant relationship between the variables of Average Collection Period, Inventory Turnover in day, Average Payment Period, Net Trading Cycle and the performance of firms Listed in Tehran Stock Exchange (TSE). There were no evidences to prove the existence of a significant relationship between Cash Conversion Cycle and the firms performance (NOP) for all years from 2006 to 2009. The results showed that the increase in Collection Period, Payment Period, and Net Trading will lead towards the reduction of profitability in the firm. In other words, managers can increase the profitability of their firms reasonably, by reducing Collection Period, Inventory Turnover, and Payment Period.