15th July 2012 Fatima L.A. Yassine and Osama S.

Hayajneh, "Financial and Administrative Science Department" The impact of Working Capital Efficiency on Profitability-an Empirical Analysis on Jordanian Manufacturing Firms, International Research Journal of finance and economics, issue 66 (2011). 1. Background of the Study: Working capital management is the same of liquidity management and its relate inversely with profitability theoretically. In other words, decision that tend to focus on the liquidity, it will tend to reduce the potential profitability of the company. A low cash conversion cycle allows the managers to minimize holdings of relative unproductive assets such as cash and marketable securities, preserves the firms debt capacity since less short-term borrowing is required to provide liquidity and corresponds to a higher present value of net cash flows from firm's assets (Jose, Lancaster, and Stevens 1996). Moreover, the cash conversion cycle is an important technique of analysis for the financial mangers of firm to assess why and when the firm needs more cash to sustain its activities and when and how it will repay the cash (Ozbayrak and Akgn(2006). According to that policy, the firm tries to manage its policies by reducing the cash conversion cycle as much as possible without effect on its operations process, and this will lead to improve its profits. In other words, when the working capital is managed improperly, allocating more than enough of it will render managementnon-efficient and reduce the benefits of short term investments (Chiou, Cheng and Wu, 2006). 2. Problem of the Study Many firms suffer from how can manage its working capital in order to reach to the optimum, then to enhance their profitability The study tries to ask the following questions: 1. What are the components of working capital for Jordanian firms? 2. What are the techniques can the firms use to achieve the optimal working capital in order to maximize the profitability? 3. Purpose of the Study: The major objective of the present study is to demonstrate the relationship between working capital efficiency and the profitability. The specific objectives of the study are summarizing as following: a) To examine the relationship between working capital efficiency and the profitability b) To analyze the relationship between the liquidity and the profitability. c) To determine the relationship between size of firm and the profitability. d) To assess the relationship between financial leverage and the profitability. 4. Literature Review Deloof (2003) found a significant negative relation between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian firms. These results suggested that managers can create value for their shareholders by reducing the number of day's accounts receivable and inventories to a reasonable minimum. The negative relation between accounts payable and profitability inconsistent with the view that less profitable firms wait longer to pay their bills. Shin and Sonen (1998) ,They found that a strong negative association exists between the firms net trade cycle and its profitability. 5. Data collection and Methodology -The sample of this study focuses on the Jordanian manufacturing firms listed in Amman Exchange Market (AEM) which cover seven years from 2000 to 2006.The sample of this study covers 53 manufacturing firms. For the analysis, the basic data contains of total of 318 observations and derive from financial statements of the annual reports of sample firms and data derived from compact disks(CDs) which designed by Amman Exchange Market (AEM). - Financial Statistical tools were used to analyze the data such as:

-Descriptive analysis was done containing the minimum, maximum, mean and standard deviation of the working capital components. - Pearson correlation analysis was done to find the relationship between all variables. -OLS Regression model (technique) was used to understand relationship between working capital efficiency and the profitably. - Different financial ratios were calculated such as CCC , Grow, CR and defined them as a variables. -T-test had been done to find the significant relationship between variables at the 1% and 5% level. 6. Findings From descriptive statistics a. The minimum value of net operating income (NOI) as measure of the profitability is -44.31% but the maximum value of net operating value is 31.4%. While the mean of net operating income is 5.7% of total assets, and the standard deviation net operating income value from its mean is about 9.23%. b. The cash conversion cycle (CCC) has -1636 days as minimum time and it is illogical value, may be referred to that the average payment period (APP) is larger than both the average receivables collection period (ARCP) and the average conversion inventory period (ACIP). The firm needs 1885.6 days as a maximum time from making its payments to receive its cash inflow. It takes an average 217 days from making its payments to receive its cash inflow with standard deviation of 269.5 days. c. The natural logarithm of size (LNS) shows minimum sales is 6.07. While the maximum sales is 8.63 in the year. The mean of sales is 7.1 of years study with standard deviation of.54. d. Growth of assets is very low which has negative sign as minimum value about -48%, Whereas the maximum value is 332% which, is very high growth. The average of growth assets is7.36% with standard deviation 5.51. From Correlation Coefficient analysis a. ARCP and NOI has Significant negative correlation at 1% of level which means, if a firm reduces the length between sales and collection, it will increase the profitability through reinvest collections in profitable investment. b. There are a significant negative relationship between cash conversion cycle (CCC) and net operating income. if the firms shorten its cash conversion cycle as much as possible without hurting its operation, it will reflect positively on profitability. c. Financial leverage which negatively related to profitability, and also significant. It means, if the firm depends on the financial leverage (FL) as much as need, it carry itself financial obligations and then it reflects negatively on its profitability. d. Correlation coefficient of the size (LNS) firm is a positive significant relationship with profitability (NOI) that indicates if the firm increases its size of sales; it will lead to increase its profitability. From Regression Analysis a. There is significant negative relationship between ARCP and NOI where as NOI was treated as dependent variable. b. The model found a negative relationship between the cash conversion cycle (CCC) and net operating income and significance that means when the firm shorten the length time between make payments and receive cash inflows, it will increase its profitability. c. Growth of the sales (GROW) relates positively and significantly with profitability at 1% significance. 7. Conclusions a. There is negative significance relationship between CCC and Profitability. b. Article shows the significant positive relationship sales, Current ratio and profitability. c. The Study reached to significant negative between financial leverage and profitability.

8. Comments Economy of the Jordan is very good thus under the assumption of good economy there could be negative relationship between working capital and profitability. But in case of under developed country result can be different such as in the context of Nepal. Individual doesnt have sufficient fund to start up or to expand the business and this phenomenon brings the borrowings concept from the market. There can be whether direct or indirect lending. Thus without having debt business cant run in Nepal and we cant say that there will be strongly negative relationship between debt and working capital management. Secondly, there is poor economy and political instability in the environment business firm needs to take a high amount of stock or raw material to continue business. This shows that there are positive relationship between profitability and working capital. This article represent the only of developed country and basically guided of financial theory ie. Negative relationship between working capital and profitability. This article didnt mention the other economies scenario. Moreover higher the due days of payable ratio gives the chances of reinvestment opportunity which leads to the increase the production unit and sales capacity and these shows the increase in profitability. Last but not least, this type of research should also focus in the various scenarios and it gives clear concept to the students as well as professionals. If we consider the Nepalese market we can take the Nepal stock exchange market and under the listed company to find out the efficient of working capital in business and relationship with profitability.