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QRFM
11,3 A systematic literature review on
working capital management – an
identification of new avenues
352 Umar Nawaz Kayani
Faculty of Management Sciences, Capital University of Science and Technology,
Received 7 May 2018 Islamabad, Pakistan, and
Revised 30 September 2018
Accepted 14 January 2019
Tracy-Anne De Silva and Christopher Gan
Faculty of Agribusiness and Commerce, Lincoln University,
Christchurch, New Zealand

Abstract
Purpose – This paper aims to provide a review of the existing literature available on working capital (WC)
and working capital management (WCM).
Design/methodology/approach – A systematic literature review (SLR) methodology is used to
review 187 articles selected from referred journals, books and international conferences for the period
1980-2017.
Findings – This comprehensive review reveals that much of the focus in the existing literature is paid on
investigating the empirical relationship between WCM and firm performance. Furthermore, the attention has
been paid towards studying the WC practices. The behavioural aspects, qualitative studies, survey studies
and systematic theory development have been ignored in most of the prior studies. These areas have a
broader scope for future research.
Research limitations/implications – This study is based on literature review and theoretical in
nature. Therefore, it does not have any empirical results.
Practical implications – So far, a limited literature review studies have been conducted in WCM
perspective. This review provides various emerging trends, which may be considered in future research for
providing a deep understanding of WCM.
Originality/value – This is the first time a detailed review of WCM literature has been conducted by using
SLR for the period of 1980-2017. This review will be useful for researchers, business policymaker, finance
professionals and all other having direct or indirect concerns with WCM study.
Keywords Systematic literature review, Working capital management, 2008 GFC,
Behavioural aspects, Systematic theory development
Paper type Literature review

1. Introduction
Over the past four decades, capital structure and capital budgeting being an important
components of long-term investment gained attention by researchers and firms. While
working capital (WC) being a short-term indicator has received less attention (Talonpoika
et al., 2016). This less attention is due to various factors such as managers considers
management of WC as a routine matter, are more frequent in nature and the decisions
Qualitative Research in Financial
Markets related to WC are reversible.
Vol. 11 No. 3, 2019
pp. 352-366
In today’s vibrant business environment, the survival of profitable firms remains
© Emerald Publishing Limited
1755-4179
uncertain unless they are able to fulfil their short term obligations. The global financial
DOI 10.1108/QRFM-05-2018-0062 crisis of 2008 (2008 GFC) has been the focus of immense importance in academia
discussions. However, the focus has been only on determining the causes, damages to the A systematic
economy and spills over the macroeconomic gauges. The major cause for this crisis was literature
liquidity shortages but working capital management (WCM) gains little academic attention.
Generally, chief financial officers have a simple and straight forward perception
review
regarding WCM. They believe WCM to be a firm’s ability to manage the difference between
short term assets and short term liabilities (Harris, 2005). WCM is one of the characteristics
of corporate finance in three broader areas. The rest of the two, capital structure and capital
budgeting are associated with the management and financing of investments over a long- 353
term period.
However, WCM is an important feature of corporate finance dealing with short-term
management of investment and financing decisions. It includes maintaining an optimum
level of WC components, such as cash, receivables, payables and inventory. The
optimization of WC aims to reduce the reliance on the requirement of WC and to realize the
maximum available revenues (Chandra, 2011; Roy, 2016).
The 2008 GFC hit almost all part of the financial world and resultantly many business
were closed down. This 2008 GFC once again attracted the interest of managers towards
WCM. The major development after 2008 GFC in field of WCM was to examine the
empirical effect of WCM on firm performance (FP). Many researchers attempted to examine
the empirical relationship between WCM and firm profitability. However, the least attention
was given towards the systematic literature review (SLR). The curiosity of researchers for
knowing about literature review on the topic of WCM creates the need for this study.
This review attempts to analyze the literature on WCM by using a SLR methodology. As
existing studies systematically review the literature on WCM at a smaller scale and at
different points in time. However, a detailed review of literature on WCM is non-existent.
Initially, a review on WCM was published by Gentry (1988), whereas the major
developments in WCM have taken place at and after the 2008 GFC. Viskari et al. (2011)
review only a small sample of 23 firms and Pratap Singh and Kumar (2014) review only 126
articles. These shortcomings formulate the basis of this study, which aims to provide a
comprehensive, detailed up-to-date literature review on WCM by reviewing 187 referred
journal articles, books and international conferences for the period of 1980-2017.
This study adds into the existing body of literature by reviewing existing literature
available on WCM. The existing review of the literature reveals that in prior studies an
empirical relationship between WCM and FP is more emphasized and less focus on surveys
and a systems approach was given. So far in prior literature financial aspect is studied more
and ignored the behavioural aspects of corporate resources in WCM. Furthermore, an event
study may be conducted in the future. Keeping in view the limitations of empirical research,
a future studies may explore the qualitative nature of studies, which may not be helpful for
examining profitability relationship but may suggest firms how to address WCM
components efficiently.
The remainder of the paper is organized as follows. Section 2 discusses the methodology
and sample selection of this review paper. Section 3 discusses overall concepts of WC, WC
policies, WCM components, and finally, WCM and FP relationship. Section 4 discusses the
WCM and 2008 global financial crisis. Section 5 discusses the analyses of existing literature
and findings. Finally, Section 6 discusses conclusion, future directions and limitations.

2. Methodology
According to Fink (2005), to review the literature one must have a methodology with a
systematic approach that explains the complete mechanism of its operations and includes all
relevant material relevant to the area of study. Therefore, on the basis of such
QRFM Idenficaon of
Sketch of Literature
Selecon of Arcle
11,3 Data

Citaon Analysis Content Analysis Organizaon of

Literature
354

Figure 1. Research Findings

Scope for Future
SLR design Research

characteristics, we used the SLR methodology suggested by Aquilani et al. (2017) and
Tranfield et al. (2003). Kitchenham et al. (2009) and Tranfield et al. (2003) are of the view that
SLR is the most appropriate methodology while attempting to review the existing literature.
These studies illustrated that the review process is divided into the following phases as
depicted in Figure 1.

2.1 Sample selection

To develop a sample for this study, a detailed, comprehensive range of articles were
reviewed on many databases such as Web of Science, Science Direct, EBSCO, Emerald
and SciVerse Scopus. The search started with a keyword and then was delimited.
Hence, it is a mixture of inductive and deductive approaches (Shukla and Jharkharia,
2013). After searching these databases, we found a large number of results but because
of financial and time constraints, we could not review all of them. So, the following
criteria were developed to select the sub-sample for this study. The criteria were as
follows:

published during 1980-2017 (37 years);

published in peer-reviewed journals, books and conferences; and

having full text available.

Articles that met these criteria were included in a preliminary sample to be further
shortlisted. To finalize the sample, a comprehensive literature search was executed by
searching for the keywords “WC” and “WCM” in the title, keywords or abstract. The
database search complying with above criteria resulted in 640 articles. To ensure the
relevance of the articles, different measures were taken. First, the papers were read to

Database Articles Selected articles

Web of Science 30 13
Science Direct 131 57
EBSCO 181 74
Table I. Emerald 97 16
Database origin of Scopus 201 27
the sample selection Total 640 187
look for relevance to this study. After a careful, comprehensive review, 219 articles A systematic
were found with a direct relationship to WCM. However, 32 articles were duplicated, i.e. literature
found in more than one database. After eliminating the duplicates, 187 articles qualified
for final review. Table I shows the database origin of the selected articles.
review

3. Working capital and working capital management

Mann (1918) defines WC as money required to perform the existing operations of an entity.
This is also known as the net WC, i.e. the amount required to keep the business running.
355
While Schaal and Haley (1991) considers WCM as the management of current assets and
current liabilities. Tables II summarizes the published definitions and concepts of WC and
WCM, respectively.

3.1 Working capital policies

The practices followed by firms while making WCM decisions are termed as WC practices.
Firms through their WC investment policy make investments in their current assets and use
current liabilities to finance their assets through the WC financing policy (Chiou et al., 2006).
Theoretically, a firm can either adopt an aggressive working capital policy or a conservative
working capital policy based on the strategy adopted by the investor (Narender et al., 2008).
The different policies affect the value, performance level and risk of firms. It is at the
discretion of firms to adopt either an aggressive or conservative WC policy (Afza and Nazir,
2007). According to Kaddumi and Ramadan (2012), firms adopt a less aggressive policy in
WC and a conservative policy for investment. For an aggressive policy, a firm may opt for a
low level of current assets or may use a high level of liabilities. In an aggressive policy, if
a firm opts for a higher level of current assets it may lead towards a negative performance; a
low level of current assets may generate issues of liquidity and inventory stock-outs (Baños-
Caballero et al., 2012). Thus, it becomes difficult to achieve a smooth operation of the
business (Van Horne and Wachowicz, 2004).
Various researchers such as Juan García-Teruel and Martinez-Solano (2007) and
Mathuva (2015) have documented that firms normally make their financial decisions based
on more conservative WC policies. In such a situation, firms adopt higher current assets and
avail lower risk. Hence, these firms expect lower returns because of the lower risk. Higher
risk and higher returns are linked to firms with more aggressive policies (Gardner et al.,
1986; Weinraub and Visscher, 1998). WC practices and policies change significantly within
industries over time. While no significant relationship between WC policies and returns
trade-off is reported by Bratland and Hornbrinck (2013) and Weinraub and Visscher (1998).

Authors Definitions of WC and WCM

Arnold (2008) WCM is a tool to create a balance between its components

Besley and Brigham A firm’s investment in short-term assets, such as cash, accounts receivables,
(2007) accounts payable and inventory is termed as WC
Dong and Su (2010) WCM is a part of the financial management of an organization that affects its
performance and liquidity
Panda (2012) WC is a difference between current assets and current liabilities
Preve and Sarria-Allende WCM is a decisions related to current assets and current liabilities
(2010)
Thachappilly (2009) WCM is the management of the flow of funds Table II.
Van Horne and WCM is the optimum level of current assets and current liabilities Published definitions
Wachowicz (2004) of WC and WCM
QRFM 3.2 Working capital management components
11,3 WCM is an important feature in making corporate strategies and policies. It is the backbone
of the financial decisions of firms taken by business managers on a daily basis. According to
Baños-Caballero et al. (2010), the most vital issue in managing WCM is the effective use of its
components: inventory, cash conversion cycle, accounts receivable and accounts payable.
Similarly, Yadav (1986) argues that WCM is a situation in which a balance between current
356 assets and current liabilities is maintained. WCM is divided into following four components
in the literature: cash conversion cycle, accounts receivables, accounts payable and
inventory (Brigham and Ehrhardt, 2013) (Figure 2). The Figure also shows how these
components are interlinked and how the operation of the business is executed with the help
of these components.

3.3 Working capital management and firm performance

WCM is an important feature in making corporate strategies and policies. It plays a very
crucial role in making financial decisions by firm managers. Various studies have examined
the impact of WCM on FP. These studies reported diverse results, some of them are reported
in Table III.

Inventory Purchased Inventory Sold

Inventory Period Accounts Receivable Period

Time
Accounts Payable Period Cash Conversion Cycle

Cash Received
Figure 2. Operang Cycle
The components of
WCM
Source: Jordan (2010) p. 413

Author(s) AR-FP Nexus INV-FP Nexus AP-FP Nexus CCC-FP Nexus

Deloof (2003) _   
Enqvist et al. (2014)    
Gill et al. (2010)  þ/ þ/ þ
Juan García-Teruel and Martinez-Solano (2007)   þ/ 
Karaduman et al. (2011)    
Lazaridis and Tryfonidis (2006)    
Mathuva (2009)  þ þ 
Nobanee and Alhajjar (2009)   þ 
Table III. Padachi (2006)  þ/  
The empirical Sharma and Kumar (2011) þ   þ
relationship between Notes: (þ) shows a positive relationship between WCM and performance; () shows a negative
WCM components relationship between WCM and performance. While þ/ shows no significant relationship
and FP Source: Author’s compilation
4. Working capital management – global financial crisis of 2008 A systematic
Sumedrea (2013) explained that the 2008 GFC has forced many firms to shut down their literature
operations due to poor management of WCM. As banks were facing a liquidity crisis and were
not in a position to provide financial support to firms for meeting their daily operation expenses.
review
Various authors have attempted to examine the impact of WCM on FP and factors
affecting WCM during 2008 GFC. Indiastuti and Febrian (2015) reported that the impact of
WCM and adoption of WC policies varied during the 2008 GFC. Ramiah et al. (2014)
examined the behaviour of Australian firms during 2008 GFC in the context of WCM 357
practices and concluded that WC practices were altered during the 2008 GFC. Scholleova
(2012) analyzed the role of WCM during 2008 GFC and reported that active management
survived during the 2008 GFC by optimizing the assets. These firms paid a strong focus on
production, sales and financing of WC. Gunay and Kesimli (2011) reported that firms have
been negatively affected to some extent by the 2008 GFC.
Baveld (2012) investigated the WCM of the public listed firms of The Netherlands before
(2004-2006) and during (2007-2009) the 2008 GFC period and reported that firms with the aim to
increase profits during crisis period did not change their WC policies and followed aggressive
WC policy. VU and Phan (2016) analyzed the impact of WCM on FP from 2008 to 2012 for 121
firms listed on Vietnam stock exchange and reported that WCM has a direct relationship with
FP. The managers during the financial crisis should focus for the earliest collection of AR to have
ample cash for the firm operations. Similarly, 2008 GFC has not only effected the management of
WC but also contributed to a failure of CG practices in firms. This failure leads to systematic
consequences (Allen, 2005; Claessens and Yurtoglu, 2013) and created the need for paying focus
on CG practices for achieving FP. The most of focus of these studies were on examining the
qualitative reasons and factors while effect WC practices and policies during 2008 GFC.
However, the quantitative aspect is missing while investigating the effect of 2008 GFC on WCM.

5. Critical review of selected studies

The overall review of 187 selected articles through SLR methodology are discussed. The
publication year, research methodology, list of selected journals, industry, geographic basis,
religious basis and analysis based on content are also discussed.

5.1 Time of publication

The literature on WCM evolved around in the period 1900-1950s, followed by the economic
development period (1950-1980) and then the period of internationalization and globalization
(1980-2017). These time periods help in describing the evolution of WC research. During
1900-1950, a minimum of attention was given to WC with about 20 articles related
published. There were a number of disputes over the concept of WC during this
evolutionary stage. However, Second World War created challenges for the business world
to develop management techniques for WC.
The business world considered the 1950-1980s as a period of economic development with
changes of thought regarding WC. Advancements in technology empowered companies
operating around the world to use the concept of economies of scale. As a result, these
companies earned higher profits by lowering their manufacturing costs.
The internationalization and globalization era started in the twentieth century but
Tedlow and Abdelal (2004) can be credited with popularizing the term and bringing it into
the mainstream business world. The importance of WCM to maintain liquidity has had
more attention since the 2008 GFC. It is evident from the literature that very limited work
was carried out during the 1980s and 1990s. The trend for a focus on WCM has been
increasing since 2007 especially after 2008 GFC.
QRFM 5.2 Research methodology used
11,3 So far, different methodologies have been used to study the impact of WCM. The
methodology in published articles can be categorized into three main types, namely: the
empirical, conceptual and survey-based approaches. From the literature, it is evident that
empirical is most common with 89 per cent of works using regression and correlation such
as conducted by prior studies (Black et al., 2006; Deloof, 2003; Gilson, 1990; Haniffa and
358 Cooke, 2002; Khan et al., 2013; Lazaridis and Tryfonidis, 2006; Mathuva, 2010; Tauringana
and Adjapong Afrifa, 2013; Tingbani, 2015). Conceptual studies were next at 7 per cent and
survey studies were 4 per cent such as conducted by prior authors (Belt and Smith, 1991;
Howorth and Westhead, 2003; Khoury et al., 1999; Kim and Rowland, 1992; Noreen et al.,
2009; Padachi et al., 2012; Wagner Ricci and Morrison, 1996). This low number of survey
studies is because of poor response rates from financial managers (Figure 3).

5.3 Journals with published work on working capital management

This analysis identifies the relevant journals that published work on WCM during 1980-
2017. In total, 96 journals published work on WCM in the period. In total, 21 journals
published more than one article on WCM. The International Research Journal of Finance and
Economics has published only 13 articles (Figure 4).

5.4 Industry-based publications

WCM has been studied across various industries such as textiles (Ali, 2011; Khan et al.,
2011; Muhammad et al., 2012; Rao, 2010; Shehzad et al., 2012), manufacturing (Ali, 2011;
Arunkumar and Radharamanan, 2011; Aygün, 2012; Owolabi and Alu, 2012; Padachi, 2006;
Padachi et al., 2012; Quayyum, 2011; Raheman et al., 2010; Yusuf and Idowu, 2012),
pharmaceuticals (Chakraborty, 2008; Farzinfar and Arani, 2012; Sur and Chakraborty, 2011),
cement (Afza and Nazir, 2011; Bilal et al., 2013; Haq et al., 2011; Javaid, 2014; Narender et al.,
2008) and hotels (Zariyawati et al., 2009). The purpose of these studies were to compare the
performance of various sectors based on the concept of WCM. The main focus of the
research was multi-industry followed by manufacturing and textiles.

5.5 Geographical analysis

It is evident after reviewing the literature that most focus on WCM has been in Central Asia,
i.e. Pakistan, India, Iran and Turkey (Ali, 2011; Arunkumar and Radharamanan, 2011;

% of Studies

4
7

Figure 3. 89
Classification of
studies on basis of
research methods
Empirical Conceptual Survey
 A systematic
literature
review

359

Figure 4.
Studies published in
various journals

Aygün, 2012; Khan et al., 2011; Muhammad et al., 2012; Owolabi and Alu, 2012; Padachi,
2006; Padachi et al., 2012; Quayyum, 2011; Raheman et al., 2010; Rao, 2010; Shehzad et al.,
2012; Yusuf and Idowu, 2012). Most studies have been carried out on a specific industry in
these countries but they have not executed a SLR. Based on the MSCI World Index
classification, the world is categorized into three main markets, namely: developed,
emerging and frontier. In this context, the focus of the studies is in emerging countries over
the past few years, such as Pakistan with 22 articles, India with 21 articles, Iran with 14
articles and Turkey with 12 articles, more than developed markets such as the USA with 7
articles and UK having 6 articles. The area of frontier markets for WCM is still challenging
and is a research opportunity (Figures 5 and 6).

5.6 Analysis based on content

Content analysis is applicable to both qualitative and quantitative studies. The main aim of this
review is to establish the area in which most work related to WCM has been carried out. Content
analysis established that most work on WCM revolves around two main areas, the relationship
between WCM and FP (Chowdhury and Amin, 2007; Deloof, 2003; Enqvist et al., 2014; Gakure
et al., 2012; Gul et al., 2013; Jahfer, 2015; Johnson and Soenen, 2003; Richards and Laughlin, 1980;
Sivashanmugam and Krishnakumar, 2016) and WCM practices (Afza and Nazir, 2007; Baños-
Caballero et al., 2010; Chiou et al., 2006; Narender et al., 2008; Weinraub and Visscher, 1998).

WCM Published Arcles

es - Emerging Markets
25
22
21
20

15 14
12

10
Figure 5.
5 Articles published on
the basis of emerging
0
markets data
Pakistan India Iran Turkey
QRFM 5.7 Findings of the review
11,3 On the basis of the SLR methodology, this review identified the gaps and scope for further
research in WCM. These are mainly research methodology, geographical distribution, religious
consideration and systematic theory development. They are discussed in detail below.
5.7.1 Research methodology. A dominance of empirical research while examining the
impact of WCM on FP has been observed. Most studies use empirical methods such as
360 ordinary least square and regression analysis to investigate the impact of WCM on FP.
Fewer studies have been conducted using a survey approach (Howorth and Westhead, 2003;
Kim and Chung, 1990; Noreen et al., 2009) to identify prevailing WCM practices. A few
researchers such as Smith and Sell (1980), Belt and Smith (1991) and Khoury et al. (1999)
have conducted survey studies to assess institutional differences in USA, Australia and
Canada, respectively. In future, researchers may like to conduct research by using a mixed
methodology as, so far, no such study has been conducted. Mixed methodology produces
interesting findings (Bryman, 2008). Furthermore, a qualitative studies by researchers in
future, which may not be helpful for examining profitability relationship but may suggest
firms how to address WCM components efficiently would be beneficial. Such kind of
qualitative studies will also help to develop field experiences that would be helpful for firms
while making business strategies (Fjellström and Guttormsen, 2016).
5.7.2 Lack of geographic concentration. Most of the studies have considered only a
specific industry or country to establish a relationship between WCM and FP. The literature
reveals a need to carry out a cross-country comparison in the context of WCM as the only
comparison study is that by Belt and Smith (1991), which compared USA and Australia. The
concept of WCM has gained immense importance 2008 GFC especially in emerging
economies and there are many opportunities for new researchers to explore the relationship
between WCM and FP in frontier markets.
5.7.3 The lack of religious consideration. The review reveals that most prior work has
been carried out to investigate the impact of WCM on a specific sector, industry or a country.
Most of these works are based on the conventional system of financing. The Islamic
financing concept, which is increasing tremendously at the rate of 15-20 per cent per year
and gaining popularity across the globe needs to be considered in future research on WCM.
The prior studies showed that even 2008 GFC did not have any effect on Islamic financing
(Ahmed, 2010). So there is a scope for future researchers to explore the relationship between
WCM and FP in Islamic finance context, which till date is very limited.

WCM Published Arcles

es - Developed Markets
7.2
7
6.8 7

6.6
6.4
6.2
6
Figure 6 5.8 6
Articles published on 5.6
the basis of developed 5.4
markets data USA UK
5.7.4 Systematic theory development. From the literature, it is noticeable that WCM has had A systematic
relatively less research and the main focus has been on investigating the empirical literature
relationship between WCM and FP. Hence, there is a need for systematic theory
development in the future direction. Only seven studies have been published on the basis of
review
conceptual ideas such as Sunday (2011) in his study proposes WCM policy for small and
medium enterprise’s and Kolay (1991) proposes a dynamic approach for WCM.

6. Conclusion and future directions

361
The study aims to review the literature on WCM by analyzing the relationship between it
and FP for an in-depth understanding of existing research. For this purpose, a SLR
methodology was adopted. The search of various databases revealed 640 articles relating to
WC and WCM. Using shortlisting criteria, a set of 187 articles was selected as the sample to
study the period 1980-2017. The trend in published studies related to WCM has been
increasing especially since 2008 GFC. This raises the issue of quality in the contribution to
the existing body of knowledge because most of the work is a replicate of other work with
slight modifications from the original idea.
The study after reviewing the existing literature finds that reduction in the invested
amount of WC helps to achieve higher levels of the profitability. The review also indicates
that after 2008 GFC emerging markets received immense attention in examining the
relationship between WCM and FP. This has resulted in a broader scope for future research
in frontier markets, which at the moment, have not been explored to any large scale. Most of
the studies have been carried out using empirical relationships and with less focus on
surveys and a systems approach. This less attention is because of the behaviour of corporate
managers who are reluctant to provide insights about WCM. Most studies have examined
financial aspects and ignored the behavioural aspects of corporate resources in WCM.
Furthermore, an event study may be conducted in future. Keeping in view the limitations of
empirical research, a future studies may explore qualitative nature of studies, which may
not be helpful for examining profitability relationship but may suggest firms how to address
WCM components efficiently. This review also provides a new direction for future
researchers to investigate the empirical relationship between WCM and FP on basis of
Islamic finance indicators, which is still non-existent in research. This study being a
literature review in nature does not have any empirical results, which is a sole limitation.

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Corresponding author
Umar Nawaz Kayani can be contacted at: umar.nawaz@cust.edu.pk

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