Working Capital Policy:

The Working capital policy of a firm is the level of investment the firm has in its current assets
to achieve its desired target. A lot of Research Specialists have studied the working Capital
policy has been studied by a lot of research specialists who have given different views. For
instance, in a study Aktas et al., (2015); Deloof, (2005); Yazdanfar & Ohman (2014). It is said
that the proper management of a working Capital has a significant influence on the financial
performance of a firm. Working capital is taken as internal resource fund of the firm which
meets the firm’s short term obligations by providing Liquidity to firms. Moreover one study
(Panda & Nanda, 2018) has shown that if a firm were to hold more working capital then it could
cause a high cost of liquidity and vice versa. The appropriate management of working capital is
essential to ensure that a firm maintains adequate liquidity while maximizing profitability
(Huang, Lu, & Zhang, 2019). Hill and Hsin (2013) stated the importance of a company’s
working capital being in line with the industry and growth rates of the company, where an
aggressive working capital management policy positively impacts profitability. Duc et al. (2019)
found that efficient management of inventory and accounts receivable increases profitability and
lower financial risk, Singh and Kumar (2017) on the other hand argue that effective working
capital management can improve the liquidity and profitability of firms. (Lazaridis & Tryfonidis,
2006) investigated the effect of working capital management on the profitability of Greek firms.
The study found a significant negative relationship between the cash conversion cycle and
profitability. It concluded that reducing the cash conversion cycle could enhance firm
performance. The results of Study showed that a more aggressive working capital policy may not
be suitable for generating more profit proving the negative relation of Working capital and
profitability of the firm.

Financial Performance:
A study by (Morara & Sibindi, 2021) states that an appropriate use of a firm’s assets
along with keeping a firm’s rivals and completion in mind is what shows how well the firm is
performing. (Kaushik & chuhan, (2019) in their study examined the relationship between the
working capital management and firm performance which was based on 211 Indian firms
covering data from 2008-2016. (Mabandla, 2018) documented a solid association between a firm
having an aggressive working capital policy and its financial performance., a study by Pestonji
and Wichitsathian (2019) found the relationship between working capital investment policy and
the profitability of a firm to be highly significant. A study by (Benrquia and Jabbouri, 2021),
shows that the monitoring of Working capital is crucial to assure the sufficient liquidity level and
to ensure accurate daily operations while also enhancing the performance and value of the firm.
Akoto et al. (2013) also studied this by using the data from different Ghanaian companies, and
the results put forward that working capital management positively influenced the firms’
profitability as measured by net operating profits. Rehman et al. (2010)’s analysis of 204
Pakistani manufacturing firms revealed the net trade, cash conversion cycles and the firm’s
inventory turnover having a notable impact on performance of the firm.

Firm Size:
“Size-Performance” theory (Demsetz & Lehn, 1985) suggests that there is a positive
relationship between the size of a firm and its financial performance, with larger firms tending to
generate more revenue, profit and higher market value compared to smaller firms .A study by
Vakilifard and Taslimi (2021) found that larger firms tend to have better financial performance
than smaller ones due to the economies of scale they enjoy. Similarly, Karabag and Kilincarsan
(2021) discovered that larger firms have a higher return on assets and equity as compared to
small firms. However, the “Resource-Based” theory (Barney, 1991) offers a different perspective
and argues that the relationship between firm size and performance is not always positive but
dependent on the availability of resources. A study by Ljubownikow and Servali (2020) suggests
that larger firms tend to have lower return on assets than smaller ones because of their difficulty
in adapting to changing market conditions. There are some scholars who have found that there is
no impact of firm size on firm financial performance. For instance, Study by Arora and Sharma
(2019) revealed that in different sector industries there is no consistent link of firm size on firm
financial performance.

Firm Age:
“U-Shaped Curve Theory” was first proposed by Penrose (1959) and has been supported
by later studies such as Haltiwanger et al. (2013). It suggested there to be a U-shaped
relationship between firm age and financial performance. In other words, as firms age, their
financial performance first declines, and then improves. This could be due to the growing pains
of a young firm and the increased competition from more established firms. “Resource-Based
View Theory” was first proposed by Werner felt (1984) and has been supported by later studies
such as Barney (1991). This theory suggests that as firms age, they accumulate resources and
capabilities that help them improve their financial performance. According to this theory, older
firms are able to develop sustainable competitive advantages that help them outperform younger
firms. One study by Lu and Beamish (2006) found that younger firms had positive relationship
between firm age and financial performance, with the effect becoming negative as the firm aged.
Another study by Mahmood and Hanafi (2013) found that older firms had better financial
performance due to their greater access to resources and market power. For example, a study by
Nilsson and Rapp (2013) found no substantial relationship between the firm’s age and its
financial performance. Overall, there is a complex relationship between the age of the firm and
its financial performance and depends upon various factors such as industry, market conditions,
and management practices.