The Interplay between Working Capital Management and a Firm’s Financial Performance across the Corporate Life Cycle

Abstract

The purpose of this study is to examine the impact of working capital management (WCM) and working capital strategy (WCS) on firm’s financial performance across different stages of the corporate life cycle (CLC). We use Pakistani non-financial listed firms nested in 12 diverse industries over a period of 2005–2014 as the research sample and employ the hierarchical linear mixed (HLM) estimator, which can process multilevel data where observations are not completely independent. The empirical findings reveal that, overall, WCM is negatively associated with firm performance. However, this association is not static across different stages of a firm’s life cycle. For example, a negative association is more pronounced at the introduction stage followed by growth and decline stages, whereas WCM does not significantly impact the performance of mature firms. Likewise, WCS also causes varying effects on the financial performance across the CLC. A conservative strategy at the introduction, growth, and decline stages negatively affects firm performance, suggesting that these firms should adopt an aggressive strategy. Nevertheless, management of sample firms did not account for the respective life cycle stage while formulating a WCM strategy, which can seriously compromise their financial sustainability. These findings suggest that firms require customized WCM policies and WCS to attain sustainable financial performance at each stage of firm life cycle. Thus, managers should not overlook the significant role of CLC stages in their financial planning to ensure the sustainable functioning of the enterprise.

Working capital and financial performance in MENA region

“…Under ROA, the results are as expected and H1 is accepted, implying the presence of a non-linear relationship between working capital and ROA. This result is consistent with the literature (Baños-Caballero et al, 2014;Afrifa, 2016;Mun and Jang, 2015;Singhania and Mehta, 2017;Altaf and Shah, 2017;Laghari and Chengang, 2019;Wang et al, 2020) suggesting the possibility of working capital level optimization.…”

Does Firm Life Cycle Impact Corporate Investment Efficiency?

“…Firm life cycle (FLC) comprises stages that are the outcomes of changes in external and internal factors, e.g., competitive environment, financial resources, managerial ability, and strategies, among others [8]. Moreover, the contemporary literature demonstrates that FLC stages have direct effects on corporate financial reporting, working capital management, corporate governance policies, bankruptcy risk, and other aspects of decision-making [9][10][11][12][13].…”

“…Dickinson [8] also presented a similar viewpoint. Therefore, by following the work of [13,49,50], we took this stage as the basis for comparing the outcomes of the other stages of the FLC.…”

Is working capital management able to increase sustainable growth through asset utilization?

“…Thus, these offers are arguably more attractive to customers (Deloof, 2003). Moreover, firms have policies to increase inventories to increase sales (Abuzayed, 2012), because firms that have a sufficient level of inventories are more likely to avoid production problems (Garcia-Teruel & Martinez-Solano, 2007) that will cause firms to lose opportunities to realize sales (Wang, et al, 2020). All in all, efforts to increase sales will need a longer cash conversion cycle.…”

“…Poor working capital management is the main cause of business failure (Smith, 1973). Consequently, numerous financial managers devote a great proportion of their time to manage working capital (Palombini & Nakamura, 2012;Botoc & Anton, 2018;Wang, Akbar, & Akbar, 2020). However, studies in working capital management so far are less developed than similar studies in the domain of long-term investing, financing, and dividend decisions (Palombini & Nakamura, 2012;Singh, Kumar, & Colombage 2017).…”