Open Access Article SciPap-989
Working Capital and Its Impact on Business Performance
by Irena Honková 1,* iD icon

1 Faculty of Economics and Administration, University of Pardubice, Studenská 95, Pardubice 53210, Czechia

* Authors to whom correspondence should be addressed.

Abstract: A number of studies indicate that the decision on the level of working capital affects business performance. Managing optimal working capital brings businesses sustained reduction of working capital, improves liquidity and increases profitability through effectively managed capital. The aim of this paper is to conduct empirical research of Czech companies on the relationship between working capital and the performance of a company. An OLS model is used that can calculate quadratic regression for calculating the optimum amount of working capital. Models are created that describe the dependency of earnings on the components that determine working capital. By deriving the quadratic function of performance, an inflection point is found, indicating a theoretical net trade cycle of 134 days for Czech companies with inventory and 70 days for Czech companies with no inventory. However, there is a level of working capital at which a higher working capital begins to be negative in terms of profitability due to the additional interest expenses and, hence, the higher probability of bankruptcy and credit risk of firms. Thus, firm managers should aim to keep as close to the optimal level as possible and try to avoid deviations from it that destroy profitability.

Keywords: Working Capital, Net Trade Cycle, Ordinary Least Squares (Ols) Method

JEL classification:   M21 - Business Economics

SciPap 2019, 27(2), 989

Received: 19 April 2019 / Accepted: 26 June 2019 / Published: 30 August 2019