Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
The Effect of Perky Strategies of Working Capital on
Companies’ Liquidity Position
Hossein Shafiei*, Ali-Akbar Darvishi** and Vahid Haji-Alizadeh***
Investors for increasing their own wealth try to do different kinds of evaluations and they
try to evaluate companies’ turnover at different aspects and for different periods of time.
For their evaluation they pay attention to different ratios like profitability, liquidity and other
financial ratios. Other groups of users of financial statements like creditors and or analysts
use similar and recondite methods to analyze and make different decisions for their
investment. Between different methods that users of financial statements use for decision
making the amount of working capital is one of the most important criteria for financial
decision makers. An entity’s continuous operation is highly dependent to companies’
resource management and working capital management has an extraordinary on financial
operation. Because operational actions that they are annually, are so much dependent to
working capital and managing liquidity structure. Working capital management is related
to financial decisions and entity’s current assets and financing for short or long term.
Managers use different policies for working capital to manage entity’s resources in best
way to achieve the best results. For this purpose managers have tried to know the best
method for different situations. Some researchers tried to understand the effect of working
capital on different aspects of operation in different companies at different situations. Thus
in this research we tried to assess the effect of different policies of working capital on
companies liquidity. For this purpose we used a regression model and some statistical
methods to estimate the effect of working capital on companies’ liquidity. The results show
that there is a significant relationship between working capital and financial leverage,
return on assets but its relationship with the size of company is inverse. In other words
changing working capital policy management essentially won’t cause a significant
decrease in company’s liquidity, and there is no special relationship between working
capital and surplus cash fundsat companies.
JEL Codes: G10, G11, E44 and E52
1. Introduction
Working capital management efficiency is vital especially for manufacturing firms, where a
major part of assets is composed of current assets (Horne and Wachowitz, 2000). It
directly affects the profitability and liquidity of firms (Raheman and Nasr, 2007). The
profitability liquidity tradeoff is important because if working capital management is not
given due considerations then the firms are likely to fail and face bankruptcy (Kargar and
Bluementhal, 1994). The significance of working capital management efficiency is
irrefutable (Filbeck and Krueger, 2005). Working capital is known as life giving force for
any economic unit and its management is considered among the most important function
of corporate management. Every organization whether, profit oriented or not, irrespective
of size and nature of business, requires necessary amount of working capital. Working
capital is the most crucial factor for maintaining liquidity, survival, solvency and profitability
of business (Mukhopadhyay, 2004). Working capital management is one of the most
*Mr. Hossein Shafiei, Department of Accounting, College of Social Science, Sirjan Branch, Islamic Azad
University, Sirjan, Iran
Corresponding Author: hshafiei@iausirjan.ac.ir
**Mr. Ali-Akbar Darvishi, MSc student in accounting, I.A.U Iran.
*** Mr. Vahid Haji-Alizadeh, Accountant, SKED Co.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
important areas while making the liquidity and profitability comparisons among firms
(Eljelly, 2004), involving the decision of the amount and composition of current assets and
the financing of these assets. The greater the relative proportion of liquid assets, the
lesser the risk of running out of cash, all other things being equal. All individual
components of working capital including cash, marketable securities, account receivables
and inventory management play a vital role in the performance of any firm. Shin and
Soenen, (1998) argued that efficient working capital management is very important to
create value for the shareholders while Smith et. al., (1997) emphasized that profitability
and liquidity are the salient goals of working capital management.
Considering the importance of working capital management the researchers focused on
evaluating the working capital management and profitability relationship such as Uyar,
2009; Samiloglu and Demirgunes, 2008; Vishnani and Shah, 2007; Teruel and Solano,
2007; Lazaridis & Tryfonidis, 2006; Padachi, 2006; Shin and Soenen, 1998; Smith et al.,
1997 and Jose et al., 1996 among others. However, there are a few studies with reference
to Pakistan like Afza and Nazir 2007 & 2008; Raheman and Nasr 2007 and Shah and
Sana 2006. Afza and Nazir (2007, 2008) focused only on the working capital management
financing policies. Other two studies focused on the relationship between profitability and
working capital management in Pakistan. Shah and Sana (2006) concentrated on the oil
and gas sector and estimated the relationship using small sample of 7 firms. Raheman
and Nasr (2007) analyzed profitability and working capital management performance of
only 94 firms listed on Karachi Stock Exchange for the period 1999-2004 only by using
Ordinary Least Square and Generalized Least Square. However this study ignored the
fixed effect of each firm as each firm has its unique characteristics and also ignored sector
wise analysis of working capital management performance of manufacturing firms.
Insufficient evidences on the firm‘s performance and working capital management with
reference to Pakistan provide a strong motivation for evaluating the relationship between
working capital management and firm performance in detail.
The crucial part in managing working capital is required maintaining its liquidity in day-today operation to ensure its smooth running and meets its obligation (Eljelly, 2004).
Liquidity plays a significant role in the successful functioning of a business firm. A firm
should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term
compulsions. A study of liquidity is of major importance to both the internal and the
external analysts because of its close relationship with day-to-day operations of a
business (Bhunia, 2010). Dilemma in liquidity management is to achieve desired tradeoff
between liquidity and profitability (Raheman et all, 2007). Referring to theory of risk and
return, investment with more risk will result to more return. Thus, firms with high liquidity of
working capital may have low risk then low profitability. Conversely, firm that has low
liquidity of working capital, facing high risk results to high profitability. The issue here is in
managing working capital, firm must take into consideration all the items in both accounts
and try to balance the risk and return (Lee et all, 2008).
Firms may have an optimal level of working capital that maximizes their value. Large
inventory and generous trade credit policy may lead to high sales. The larger 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 state that
delaying payment of accounts payable to suppliers allows firms to access the quality of
bough 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.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
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), for example, found that the longer the
time lag, the larger the investment in working capital. 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 and/or granting more trade
credit to customers.
A variety of variables related to working capital management that might potentially be
associated or ‗responsible‘ for the profitability of manufacturing firms can be found in the
literature. In this study, the choice of explanatory variables is based on alternative theories
related to working capital management and profitability and additional variables that were
studied in reported empirical work. The choice is sometimes limited, however, due to lack
of data. As a result, the final set includes eight proxy variables: accounts receivables,
accounts payables, inventory, cash conversion cycle, firm size, financial debt ratio, fixed
financial assets ratio, and gross operating profit.
This study contributes to the effect of perky strategies of working capital on companies‘
liquidity position in at least two ways. First, it focuses on Tehran Stock Exchange
Companies where only limited research has been conducted on such firms recently.
Second, this study validates some of the finding of previous authors by testing the The
effect of perky strategies of working capital on companies‘ liquidity position. Thus, this
study adds substance to the existing theory developed by previous authors.
2. Literature Review
As earlier stated, the survival of any business depends on its ability of meet, either in the
short run or in the long-run, and it obligations as they fall due and also take opportunities
either in the form of prompt payment of liabilities in order to enjoying discounts and also to
finance business expansion. It is important to state at this point that profitability does not
always amount to liquidity as such a critical analysis of company‘s inflow and expected
outflow in an accounting period is gamine to effective cash management.
Torre (1997) defines treasury (cash) management as a set of techniques that act on the
short-term liquidity of a company, and at the same time affect those factors and processes
that translate immediately into cash, with the ultimate aim of increasing both the liquidity
and profitability of the company. In this sense cash management is the back bone of
liquidity management as it affects corporate profitability. Cash in excess of what is
required need to be invested in short term securities pending when it is required. The
major problem faced by most businesses is the ability to determine the minimum cash
level required by the business. Minimum cash level assist management to maintain
enough cash to meet its day-to-day operating expenses.
To prevent breaks or gaps in the trading cycle due to lack of cash, administrators must
calculate the cash amount best suited to their level of activity, plan the timing of the
relevant payments and collections and draw up a policy of investment in assets with high
liquidity that can be converted to cash at a low transactional cost to serve as support for
the treasury funds maintained by the company (Kamath, 1985; Srinivasan & Kim, 1986). It
is therefore essential to establish the right level of disposable assets to short-term
financial investments at companies. Holding the wrong amount in cash or cash equivalent
may interrupt the normal flow of business activities. Moreover, the wrong safety margin
may result in financial difficulties, with firms unable to meet needs that may arise at any
given time or unable to take advantage of unexpected investment opportunities.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Maintaining a cash surplus thus has a number of advantages. It enables companies to
carry on the normal transactions that arise in the course of their activities and avoid any
treasury gaps. It also help them cover any unexpected needs for cash by acting as a
preventive balance. However, there are also disadvantages in being too conservative, as
reflected in the opportunity costs entailed by assets with little or no profitability.
Long et al.(2003) developed a model of trade credit in which asymmetric information leads
good firms to extend trade credit so that buyers can verify product quality before payment.
Their sample contained all industrial (SIC 2000 through 3999) firms with data available
from COMPUSTAT for the three-year period ending in 1987 and used regression analysis.
They defined trade credit policy as the average time receivables are outstanding and
measured this variable by computing each firm's days of sales outstanding (DSO), as
accounts receivable per dollar of daily sales. To reduce variability, they averaged DSO
and all other measures over a three year period. They found evidence consistent with the
model. The findings suggest that producers may increase the implicit cost of extending
trade credit by financing their receivables through payables and short-term borrowing.
Shin and Soenen (1998), researched the relationship between working capital
management and value creation for shareholders. The standard measure for working
capital management is the cash conversion cycle (CCC). Cash conversion period reflects
the time span between disbursement and collection of cash. It is measured by estimating
the inventory conversion period and the receivable conversion period, less the payables
conversion period. In their study, Shin and Soenen (1998) used net-trade cycle (NTC) as a
measure of working capital management. NTC is basically equal to the cash conversion
cycle (CCC) where all three components are expressed as a percentage of sales. NTC
may be a proxy for additional working capital needs as a function of the projected sales
growth. They examined this relationship by using correlation and regression analysis, by
industry, and working capital intensity. Using a
COMPUSTAT sample of 58,985 firm years covering the period 1975-1994, they found a
strong negative relationship between the length of the firm's net-trade cycle and its
profitability. Based on the findings, they suggest that one possible way to create
shareholder value is to reduce firm‘s NTC. To test the relationship between working capital
management and corporate profitability, Deloof (2003), used a sample of 1,009 large
Belgian non-financial firms for a period of 1992-1996. By using correlation and regression
tests, he found significant negative relationship between gross operating income and the
number of days accounts receivable, inventories, and accounts payable of
Belgian firms. Based on the study results, he suggests that managers can increase
corporate profitability by reducing the number of day‘s accounts receivable and
inventories.
3. Hypothesis
In order to investigate the effect of perky strategies of working capital on companies‘
liquidity position, our study specifies the following hypothesis:
3.1. Hypothesis 1
H0: companies that they have perky strategies about current assets in compare to
companies that don‘t have perky strategies they have lower surplus cash.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
3.2. Hypothesis 2
H0: companies that they have perky strategies about current liabilities in compare to
companies that don‘t have perky strategies they have lower surplus cash.
3.3. Hypothesis 3
H0: The strategy of working capital management have a significant effect on companies
surplus cash.
4. The Methodology and Model
4.1 Model
The impact of working capital management on corporate performance of manufacturing sector is
tested by panel data methodology. The panel data methodology used has certain benefits like using
the assumption that firms are heterogeneous, more variability, less colinearity between variables,
more informative data, more degree of freedom and more efficiency (Baltagi, 2001).
In order to find out the relationship between different variables, first Pearson Correlation
Coefficients are calculated. The impact of working capital management on firms’ performance is
than investigated using balanced panel data of manufacturing firms listed at Karachi Stock
Exchange. For this purpose, we develop an empirical framework first used by Beheshti (2014):
1st model:
ECMit = α +β1 C.assetit +β2 C.liabilityit + έ
When:
ECMit is equal to surplus cash fundsfunds of company i for the period t. C.assetit is equal
to current assets of company i for the period t and C.liabilityit is the current liability of
company i for the period t.
ECM is calculated as the rest of 2nd model:
Cit = α0 + α1bmit + α2 sizeit + α3cpxit +α4wcit + α5ltdit +α6rdit + α7cfit + α8σit +
ECMit
When:
Cit equals to natural logarithm of total assets of company except cash of company i at the
year t.
bmit equals to book value to market value of company i at the year t.
sizeit is natural logarithm of total assets of company i at the year t.
cpxit is the ratio of net cash flow of investment activities to total assets of company i at the
year t.
wcit is the ratio of working capital to total assets of company i at the year t.
ltdit is the ratio of long term liabilities to total assets of company i at the year t.
rdit is the ratio of research and development expenditures to sale of company i at the year
t.
cfit is the cash flow turnover of company i at the year t.
σit is the standard deviation of cash flow of company i at the year t in a special industry.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
4.2 Data and Sampling
The data we needed for our hypothesis testing were gathered from financial statements of
listed companies at Tehran Stock Exchange (TSE). The data gathered for the period 2008
to 2013.
For sampling the systematic elimination method is used. At this systematic method there
were some limitations that they are:
 Banks, investment companies an insurance companies are eliminated from ample.

Companies that their financial period end is not at the end of year are eliminated
from sample.

At the whole period of research they be accepted at TSE,

The data required for model analysis be available.
After using these limitations only 125 companies from 385 companies were chosen.
5. Findings
5.1. Correlation Analysis
Correlation matrix of all variables included in the analysis is presented in Table 3 which is
calculated based on data of 125 firms for 6 years.
Surplus
cash funds
Surplus cash
funds
strategy
Size
Rate of
return
Leverage
Pearson Correlation
strategy
size
Rate of
return
leverage
1
Sig. (2-tailed)
Pearson Correlation
.024
Sig. (2-tailed)
.520
1
Pearson Correlation
-.027
.029
Sig. (2-tailed)
.466
.420
Pearson Correlation
.065
-.086(*)
-.037
Sig. (2-tailed)
.077
.019
.310
Pearson Correlation
.024
.537(**)
-.069
-.068
Sig. (2-tailed)
.507
.000
.060
.064
1
1
1
5.2. Descriptive Statistics
Table 1 presents the minimum, maximum, mean, standard deviation, variance, standard
deviation for whole variables of this research model.
Table 1: The results of descriptive analysis for model variables
Current
Liabilities
Working
Capital
1924375.44
1998306.47
-73931.03
.007909
1924375.44
1998306.47
373427.00
375617.50
15872.00
.054868
373427.00
375617.50
5785277.192
7165954.311
2288601.3
.412697
5785277.1
7165954.311
6.135
7.703
-5.855
-.792
6.135
7.703
46.032
69.349
66.177
1.730
46.032
69.349
Current Assets
Mean
Median
Std. Deviation
Skewness
Kurtosis
Surplus
Cash
Assets
Liabilities
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
5.3. Findings
Table 2 presents the different strategies mean of working capital and standard deviation
and t student for companies used a conservative strategy and companies applied a perky
one.
Table 2: Working capital mean and std. deviation of different strategies
Strategy
Mean of Working Capital
Std. Deviation
Conservative
459267.55
1352933.813
Perky
-778377.11
2988189.153
t
t=6.915
P=.0001
Regarding the t value in table 2 there is a significant difference in working capital for
companies that they use a Conservative strategy and companies that they use a perky
strategy.
Table 3 presents the different strategies mean of current assets and standard deviation
and t student for companies used a conservative strategy and companies applied a perky
one.
Table 3: current assets mean and std. deviation of different strategies
Strategy
Mean of Current assets
Std. Deviation
1635091.71
2319724.98
t=-1.600
3941987.904
7568342.395
P=.110
Conservative
Perky
t
Regarding the t value in table 3 there is no significant difference in current assets for
companies that they use a Conservative strategy and companies that they use a perky
strategy.
Table 4 presents the different strategies mean of assets and standard deviation and t
student for companies used a conservative strategy and companies applied a perky one.
Table 4: assets mean and std. deviation of different strategies
Strategy
Mean of Assets
Std. Deviation
Conservative
1635091.71
3941987.904
Perky
2319724.98
7568342.395
t
t=-1.478
P=.140
Regarding the t value in table 4 there is no significant difference in assets for companies
that they use a Conservative strategy and companies that they use a perky strategy.
Table 5 presents the different strategies mean of liabilities and standard deviation and t
student for companies used a conservative strategy and companies applied a perky one.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Table 5: liabilities mean and std. deviation of different strategies
Strategy
Mean of Liabilities
Std. Deviation
Conservative
3185851.17
2318052.131
Perky
7097359.09
17501046.821
t
t=-3.196
P=.0001
Regarding the t value in table 5 there is a significant difference in assets for companies
that they use a Conservative strategy and companies that they use a perky strategy.
Table 6 presents the different strategies mean of current liabilities and standard deviation
and t student for companies used a conservative strategy and companies applied a perky
one.
Table 6: current liabilities mean and std. deviation of different strategies
Strategy
Mean of Current Liabilities
Std. Deviation
Conservative
1175824.16
2960065.369
Perky
3098102.08
10301053.972
t
t=-3.249
P=.001
Regarding the t value in table 6 there is a significant difference in assets for companies
that they use a Conservative strategy and companies that they use a perky strategy.
Table 7 presents the different strategies mean of surplus cash funds and standard
deviation and t student for companies used a conservative strategy and companies
applied a perky one.
Table 7: surplus cash funds mean and std. deviation of different strategies
Strategy
Mean of Surplus Cash funds
Std. Deviation
Conservative
.000378429
.40113
Perky
.016148953
.42900
t
t=-.516
P=.606
Regarding the t value in table 7, there is no significant difference in surplus cash funds for
companies used a conservative strategy and companies applied a perky one.
Table 8 presents the different strategies mean of leverage, size and rate of return and
standard deviation and t student for companies used a conservative strategy and
companies applied a perky one.
Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Table 8: compared mean of leverage, size and rate of
return for companies with different strategies
leverage
size
Rate of Return
Std.
deviation
t
p
.70726
.196
-15.760
.000
1.6687
1.08133
conservative
5.985980E0
.6038188
-.727
.467
perky
6.021495E0
.7013616
conservative
3.415674
20.2349
2.690
.007
perky
.7061089
3.7693
strategy
Mean
conservative
perky
Regarding the t value for leverage in table 8, there is a significant difference in leverage
for companies used a conservative strategy and companies applied a perky one. And
regarding the t value for size in table 8, there is no significant difference in size for
companies used a conservative strategy and companies applied a perky one. And
regarding the t value in table 8, there is a significant difference in rate of return for
companies used a conservative strategy and companies applied a perky one.
6. Conclusion
In the current challenging economic environment and increasing external resources,
assets and current liabilities i.e. working capital of the company is important and working
capital management firms can be considered as a competitive advantage for them. The
main goal of this paper tried to show the effect of perky strategies of working capital on
companies‘ liquidity position focused on the policies and strategies of listed companies on
the TSE companies‘ liquidity. This study results shows a direct relationship between the
variables strategy, working capital, financial leverage and return on assets are; But the
company has excess cash variable is inversely related to firm size, i.e. the change in
working capital strategy firm, does not necessarily reduce the amount of excess cash, In
other words, a significant association between working capital policy with no excess cash.
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