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Nurturing Business Sustainability

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Working Capital Management on Financial Performance in Jordan

Abdallah Tayseer Ahmad and Yuvaraj Ganesan
Graduate School of Business, Universiti Sains Malaysia
From the years 1999 – 2009 Jordan experienced impressive growth acceleration,
tripling its exports and increasing income per capita by 38 percent. Since then, a
number of external shocks that include the Global Financial Crisis (2008-2009), the
Arab Spring (2011), the Syrian Civil War (2011), and the emergence of the Islamic
State (2014) have affected Jordan in significant ways and thrown its economy out of
balance. Jordan’s debt-to-GDP ratio has ballooned from 55percent (2009) to 94
percent (Hausmann et al., 2019). Now Jordan is experiencing poor financial
performance in both the industrial and service sectors (Tawfeeq & Alabdullah, 2018).

Moreover, Jordanian non-financial firms have faced several problems and decrease
starting from 2011. They showed that Jordan economy, especially non-financial firms,
have faced several problems and challenges because of the regional instability, high
level of unemployment, a dependency on remittances, and grants from Gulf
economies besides continued pressure on natural resources (Alabdullah, 2018).
This research addresses this lacuna by focusing on working capital management by
the management of the organization’s current assets and current liabilities. Indeed,
working capital management is a life-giving force to an organization and efficient
working capital management is one of the pre before conditions for the financial
success of an organization indicate that on average, the most frequently performed
routines in managing working capital relate to safeguarding cash and inventory, and
credit risk assessment (Kabuye, Kato, Akugizibwe, & Bugambiro, 2019). The ratio
shows the extent to which the claim of creditors can be quickly met. A low ratio
indicates that two much capital is tied up in stocks (Bagh, Nazir, Khan, Khan, &
Razzaq, 2016) and 50 percent decisions from financial managers are associated with
WCM (Bagh et al., 2016). Working capital is a vital part of business investment which
is essential for continuous business operations (Mokeira Nyabuti, 2014). Working
capital management is an important aspect of financial management. It is the
lifeblood and Controlling nerve center for any types of business organization because
without the proper control of it, no business can run smoothly (Yahaya&Bala, 2015).
Optimal WCM leads to proper management of current assets to generate enough
funds to satisfy the short-term obligations in a significant manner (Bhutto, Rajper,
Ghumro, & Mangi, 2018) and the management of working capital affects the financial
performance of a firm especially manufacturing firms. This is because working capital
is a strong and vital part of business investment which is essential for continuous
business operations (Mokeira Nyabuti, 2014). The concept of working capital
management (WCM) has gained much attention lately and it is important for
businesses to embrace it due to its direct impact towards business financial
performance (through Average Collection Period and Average Payment Period and
Inventory Turnover and Cash Conversion Cycle). As such, this paper sheds some
light on the salience of WCM and provides valuable insights on how businesses can
capitalize on WCM to improve its financial performance. The figure below depicts the
key WCM practices that have been adopted as independent variables in the study
and its influence on business performance (the dependent variable).