Working capital management and firm performance of turkish companies

Abstract

Introduction Working capital management is vital for corporate finance because of its contribution to shareholder value by maintaining the balance between profitability and risk. In particular, firms that invest less in working capital are assumed to have higher returns and risks, while firms investing heavily in working capital are assumed to have lower returns and risks (Banos-Caballero et al., 2012). Effective working capital management is very important because it affects the performance and liquidity of the firm. The main objective of working capital management is to ensure the optimal balance among working capital components. Effective working capital management is an essential part of the overall company strategy to create shareholder value. Therefore, companies try to maintain the optimal working capital level to maximize their firm value (Vural et al., 2012). Effective working capital enables companies to be successful and to survive, while poor and mismanagement is the main reason for small business failures (Tahir and Anuar, 2016). The primary purpose of working capital management is to provide the appropriate liquidity for the company’s sustainability and activities and to fulfill its short-term financial liabilities. Therefore, current assets and short-term liabilities are important components of total assets and hence careful evaluation of total assets is of utmost importance. However, working capital management is a complex task because of an inverse relationship between liquidity and profitability. While the primary purpose of any company is profit maximization, it also needs to obtain the appropriate…. © Peter Lang GmbH Internationaler Verlag der Wissenschaften Berlin 2019.