Investigating the certain point of inflation and optimal level of working capital management and its impact on the financial performance of the companies

The purpose of this paper is investigating the certain point of inflation and optimal level of working capital management and its impact on the financial performance of the companies. Inflation variable is measured using the Consumer price index and the measurement of the working capital management is done using the variable of Net working capital. Financial performance variable is measured using the variable of return on assets ratio. To achieve this goal the data of 90 companies listed in Tehran Stock Exchange during the financial periods from 2008 to 2017 is used. The results of this study showed that there is a non-linear and inverse U-shape relationship between Inflation and financial performance. This means that as the inflation increases the financial performance of firms will increase, but when inflation reaches a certain point, the financial performance will decrease as the inflation increases. The results showed, this is the critical point inflation for Iranian firms, 14 percent and for firms with positive working capital 17 percent. Also, the results showed that there is a non-linear and inverse U-shape relationship between working capital and financial performance, which indicates the existence of an optimal working capital level for firms. This study also reveals that working capital management is an important factor in the relationship between Inflation and financial performance.