Abstract

Background & Statement of the problem: Working capital management focuses on maintaining an optimal balance between short-term investments and liquidity, being a key factor impacting a company’s performance and profitability. Increasing profitability requires riskier investments, yet holding large amounts of liquidity may lead to missed investment opportunities. Effective working capital management aims to strike a balance between short-term assets and liabilities to ensure desired returns at an acceptable level of risk. Objectives: This research examines the effect of working capital management on the profitability of a sample of Industrial and service companies listed in the Amman Stock Exchange over the period 2009 - 2018. To test the hypotheses. Methods: The study implements the variable effect regression model (VERM) to measure the impact of net working capital on different measures of profitability. In addition, we investigate the effect of working capital components (like the cash conversion cycle, the average inventory turnover, the average collection period and the average payment period) on the firms’ profitability. Results: The study finds a positive and significant effect of net working capital on the Jordanian firms’ accounting profitability, while firms’ profitability is affected negatively by both the increase in average inventory and the average repayment period. However, no significant impact is found between cash conversion cycle and profitability. We could not find any impact of net working capital and its components on firms’ market measure of profitability. Conclusions (Recommendations and contributions): The study recommends the need for optimal investment in working capital to avoid investments that are accompanied by high storage costs. A significant amount of resources should be devoted to developing an effective working capital management policy that ultimately leads to increased profitability.