ABSTRACT

Large inventory also reduces the risk of a stock-out. Trade credit may stimulate sales because it allows a firm to access product quality before paying  (Raheman and Nasr, 2007). Another component of working capital is accounts payables, Raheman and Nasr (2007) indicated that delaying payment of accounts payable to suppliers allows firms to access the quality of obtaining products and can be inexpensive and flexible source of financing. On the other hand, delaying of such payables can be expensive if a firm is offered a discount for the early payment. By the same token, uncollected accounts receivables can lead to cash inflow problems for the firm. A popular measure of working capital management is the cash conversion cycle, that is, the time span between the expenditure for the purchases of raw materials and the collection of sales of finished goods. Deloof (2003) found that the longer the time lags, the larger the investment in working capital, and also a long cash conversion cycle might increase profitability because it leads to higher sales. However, corporate profitability might decrease with the cash conversion cycle, if the costs of higher investment in working capital rise faster than the benefits of holding more inventories or granting more trade credit to customers. And the main cause of the failure of a business enterprise has been found to be the shortage of working capital, their mishandling, and mismanagement of working capital and underutilization of capacity (Vataliya, 2009). In general, working capital management is not only improving financial performance in today's cash-strapped and uncertain economy, but it is the question of meeting firm's day to day operation. Therefore, it is a significant issue to know and understand the impacts of working capital management and its influence on firms' performance. Also, several research works have identified the impact of working capital management on the performance of organizations.