Management of working capital is not only complex but also costly. Determination of optimal levels of working capital is not straight forward as it is dependent on a number of factors. These factors may be internal, for instance type of financing mode adopted, business strategy or even credit or cash policy or external factors such as interest rates, foreign currency exchange rates or government laws and legislation. This study being a critical review of literature sought to evaluate theoretical and empirical literature on the relationship between firm performance and working capital management. The study established that working capital management had a significant effect on firm performance although this effect was mixed across the working capital components. Further, there was great support for the existence of other variables that affected the relationship between working capital management and firm performance although most studies focused on the direct relationship. Specifically, the study noted that business strategy and financing methods had a significant effect on this relationship. This study recommended that research on this topic should be extended to these variables across more economies and use of expanded time series data for representativeness.
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