Working Capital Efficiency and the Reduction Risk-Case Study

Abstract

Working capital efficiency (WCE) and the institutional performance are factors becoming more important for institutional survive in choosing specific types of investments reflecting institutional activities, and even more influential than the effect of other issues such as country specific. Consequently the concept of WCE has received attention in the economic institution. The WCE concept, analyzes the relationship between the risk and the WCE concepts of going the institution insolvent, and therefore giving the institution an alert concerning its surviving in the related industry. The aims of this research is to obtain empirical indicators for predicting future institution insolvency using two proxies, the related economic financial metrics and Altman Z-score equation and to find the answer to the main question: ‘’ is the issues related to the WCE may be judged through different economic financial metrics criteria, and using Altman Z-score equation to assess institution’s financial distress? ‘’. Furthermore, the research tests the possible interactive effect of the relationship between WCE and institution finical distress. The research is focus practically on the institutions’ negligence of the economic financial analysis system implemented and the associated problems seriously. The purposeful sample of this research is an institution where the empirical study is applied to predict its economic financial distress, as expectations and predictions that this institution is unable to pay its liabilities in the near future are based upon the two proxies analysis used. The institution will be given a default name ‘’Al-Najat institution for Durable Products” due to the sensitivity of the subject and not to defame it, is chosen as the stratified random sample method for studying its organizational behavior and performance in a practical way to bring the attention for its dysfunctional practice. The tools used for data collection is its final financial balance assigned by the institution for the period (2016-2018). Judgment is based on using the economic statistical analysis of the related economic financial metrics criteria, and using the Altman Z-score for the above mentioned period in examining the conditions of financial distress. The finding indicates that correlation between these two concepts exists; high and stable with other financial evidences represent the weakness of the institution for the given period. The analysis results shows that the Z-score was less than 1.81, (Z-score<1.8). In the liquidity ratio, the working capital is less than (one) indicating the low WCE in the related periods. The leverage ratios the total liabilities to total assets was increased from (39.43%) to (54.42%), indicating that assets is less than the liabilities. For the same period of time (2016-2018), the net profit margin to total sales became negative amount from (31-33.%) to (-75.01%). Inventory turnover is decreased by (0.97 times) to (0.78 times), the net profit to total assets percentage are negative and declining (-8.25%, -2.01%), and the book value ratio declined from (0.795 $) to (0.521 $) for the same period. In conclusion, the financial distress for the concerning institution is reasonably high, and the institutions’ management should take a serious steps in order to survive in the industry within the economy. The researcher’s conclusions based on the analysis is that employee’s poor performance in taking decisions concerning the institution investments assigned, the lack of effective monitoring, and system evaluation performance inside the institution are elements contributing to the expected institution financial distress. This implies that the institution should stay out of risks to achieve economic benefits, also, investment in different sectors of the economy for keeping WCE workable and reducing total risks.