“Cash flows and financial performance in the industrial sector of Saudi Arabia: With special reference to Insurance and Manufacturing Sectors”

ARTICLE INFO Abdul Rahman and Raj Bahadur Sharma (2020). Cash flows and financial performance in the industrial sector of Saudi Arabia: With special reference to Insurance and Manufacturing Sectors. Investment Management and Financial Innovations, 17(4), 76-84. doi:10.21511/imfi.17(4).2020.07 DOI http://dx.doi.org/10.21511/imfi.17(4).2020.07 RELEASED ON Friday, 06 November 2020 RECEIVED ON Monday, 05 October 2020 ACCEPTED ON Monday, 02 November 2020


INTRODUCTION
Financial performance evaluation is one of the most important concerns of all companies that use distinct financial resources to undertake successful projects to achieve profit maximization and wealth maximization. In this context, every business's economic prosperity involved in product and service activities depends upon the efficient and effective cash management within and outside the organization (Liman & Mohammed, 2018). A firm merely being profitable does not mean that it is financially stable. A firm's financial performance vests with its policies and cash flows and is determined with the help of return on assets (ROA), return on equity (ROE), and the objective is that the firm should be capable of generating cash through operating, financing and investing activities. Moreover, a firm's failure in compliance with proper management in operating cash flows might lead to a decrease in financial performance. Therefore, every firm should be able to manage its cash flows to reach the level of performance.
The cash flow statement is significant in its role in improving the efficiency and effectiveness of decisions by the decision making body in terms of proper financial planning, firm's earning capability and its spending, deep insight into the areas of operating activities and financing activities, stock pricing ability and payment of dividends to stockholders, etc. It also helps evaluate the company's liquidity posi-tion in terms of cash generation and payment of short-term obligations (Alslihat & Al-nimer, 2017). This statement reports the movement of cash and its equivalents over time and its impact on the cash management of business (Atrill & Mclaney, 2011;David et al., 2018). Gombola et al. (1987) are the initiators in examining the impact of operating cash flows in predicting bankruptcy during the 1970s and found an insignificant relationship with corporate bankruptcy. They believed that the operating cash flow of a firm is a weak predictor of financial failure. There is a non-linear relationship between cash holding and financial performance for the listed and non-listed firms of Saudi Arabia (Alnori, 2020). The main aim of establishing companies is dynamism, corporate diversification, and earnings growth measured through different financial factors. Further, a firm's success depends upon its long-term investment, which requires a large amount of cash holdings in hand. Therefore, the spending of a huge amount of cash holdings on investments might have a negative impact on financial performance (Liman & Mohammed, 2018).
The companies in the insurance industry of Saudi Arabia face strong competition among themselves and the government, self-insurance, and other retention groups. The insurance industry is compared with the insurance sector in the GCC region. The market research on the insurance industry of Saudi Arabia reported many insights on the emerging insurance applications. The economy of Saudi Arabia is growing at a rapid transformation speed. The manufacturing industry is largely being supported in the objective of transformation. The manufacturing sector's advancement can be visualized by the plan prepared at a large level, which consists of industrial hubs, advanced infrastructure, an advanced supply of materials, highly sophisticated transportation, etc. Therefore, the current study intends to carry out the impact of cash flow from operations on companies' financial performance under the manufacturing and insurance sectors. Farshadfar et al. (2008) examined the relative ability to earn and cash flow data in forecasting future cash flow for Australian companies. They found CFOs powerful in predicting future cash flows than earning and traditional measures. Salehi et al. (2018) studied the effect of cash flow statements on audit fees on the companies listed on the Tehran Stock Exchange and found that excess cash holdings reduce the audit fees. Amuzu (2010) studied individual data points from 2003 to 2005 for listed Ghanaian companies. He determined the use of cash flow analysis in selected enterprises in Ghana. It was found that the income statements and balance sheets would not show that Ghanaian companies operate in a similar way to developed countries like the US. It was found that some companies had spent an extremely large amount in buying assets in cash, which almost but not quite in a vulnerable position. Bradbury (2011) examined the impact of direct and indirect cash flow statements on firms' financial performance. He found that the format of direct cash flow reporting is better in predicting firms' performance compared to the indirect reporting of cash flows. Almajali et al.

LITERATURE REVIEW
(2012) investigated the factors affecting the performance of jordanian insurance companies. They report a positive association of liquidity, leverage, size, and competence on selected insurance companies' financial performance.
Similarly, Sayari and Mugan (2013) studied the effect of cash flows on the firms' bankruptcy using its different aspects. They found a negative association of operating cash flows with the firms' bankruptcy, while the other aspects have a positive relationship. Bhandari and Iyer (2013) intend to forecast failures of business using CFOs. They analyzed by DA model and the cross-validated approach method and Chi-square test. They found that 83.3 percent originally grouped and 79.5 percent cross-validated by a cross-validated approach. Velnampy and Kajananthan (2013) analyzed cash position and profitability among listed telecommunication firms in Sri Lanka. They found a little change in study variables between the two listed firms. However, they proved a significant association between cash position ratios and return on equity and assets in Dialog Telecommunications. Khan et al. (2013) studied the impact of different financial ratios on stock return. They concluded that the variation in capital structure and firm performance does affect the shares return of the Pakistani textile industry. Atieh (2014) investigated the liquidity position of the pharmaceutical sector of Jordanian companies. The results show a difference between the traditional ratios of balance sheets and cash flow ratios, which derived from the cash flow statement.
Further, a study by Afrifa (2016) examines the association between cash flows and firm performance. He suggested that the firms with sufficient cash flows should invest in working capital, while less cash flow firms should invest less to reach the performance level. Ikechukwu et al. (2015) studied the impact of operating cash flows on the banks' profitability. They found a positive association between operating cash flows and the profitability of the banking sector in Nigeria. D. Nguyen and A. Nguyen (2020) examined the effect of cash flow statements on commercial banks' lending decisions. They reported that the statement of cash flows play a significant role in the lending decisions of banks. Augustine and Jacob (2017) examined the impact of CFOs on the performance of Nigerian companies. They reported that variables such as cash conversion, cash deposits are positively associated with return on assets while cash flow and firm size are negatively related. Ogbeide and Akanji (2017) studied the effect of CFOs on Nigerian insurance companies' financial performance. The findings reveal that the cash flow determines a significant role in determining the insurance sector's financial performance. They recommended that frequent cash flow in the insurance sector makes cash flow negative and causes a financial crisis. Habrosh (2017) examined the significant impact of the Cash flow, profitability, liquidity, and Capital ratio on companies' financial performance listed in the Indonesian stock exchange. The research results indicate that operating cash flow, ROA, CAR had a significant effect on company financial performance. Ukhriyawati et al. (2017) studied the influence of assets structure, capital structure, and risk management on financial performance and free cash flow by using intervening variables in Indonesia's listed banking companies. They found that free cash flow influences positively and significantly financial performance, whereas earnings influence positively and significantly the companies' value.
Furthermore, Liman and Mohammed (2018) examined the impact of cash flow and Nigerian companies' corporate financial performance. They found a positive and insignificant impact between cash flow and operating activities, and financial performance. They recommended that increasing financial leverage reduces agency costs associated with equity. Gupta and Mahakud (2019) examined the impact of financial development on corporate investment and the effect of financial development on the investment cash flow sensitivity. The study employed a generalized method of moment (GMM) estimate technique, and the result revealed that cash flow affects the investment decision of company financial performance positively. Miletic (2014) examined the problems in the application of cash flow statements. He reported that the statements of large firms are effective, while that of small and medium firms needs improvement. Günay and Fatih (2020) studied tourism companies listed on Borsa İstanbul Tourism (BIST) using the MAIRCA hybrid model. They found that cash ratio, cash to sales, and cash to long-term debts are the most important criteria in assessing firms' financial performance. Dimitrijevic (2015) reviewed the manipulations in cash flow statements and balance sheets. He reported that the firms have many techniques of manipulations to show the best results to the public.
The empirical studies review shows that the researchers have used different sectors, variables in examining the impact of cash flow from operations on financial performance. From the studies reviewed, few studies report a positive impact and a vice-versa by other studies, and a few more studies report insignificant relationships. Moreover, no studies explain the relationship between operating cash flows and companies' financial performance in Saudi Arabia. Therefore, the current study might be considered an initiator in conducting such a relationship between the two important sectors of Saudi Arabia.

HYPOTHESES
The current study examining the impact of operating cash flows on financial performance has the following hypotheses:

RESEARCH METHODOLOGY
The study examines the impact of operating cash flows on the companies' financial performance in the manufacturing and insurance sectors listed on the Tadawul stock exchange during the period 2015-2018 for insurance companies, while it is 2014-2018 for manufacturing companies. The study sample consists of five (5) companies from each sector totaling 10. The sample size of the current study depends upon the availability of financial data.

Data collection and analysis
The data were collected from companies' financial reports and were used to calculate different financial ratios employed as dependent and independent variables in the study. Descriptive statistics, correlation, pooled regression was adopted for empirical analysis. Further, the study conducted diagnostic tests, such as the test of normality, heteroscedasticity, multicollinearity, etc. to examine the robustness of the results.

Estimated regression model
The study estimates a pooled regression to examine the impact of operating cash flows on the financial performance. where in as per Eqs. 1 and 2 α 0 is the constant, while β 1 is the coefficient of independent variable CFO that should be positive and significant to explain the financial performance, β 2 and β 3 are control variables, while β 4 is the coefficient of dummy variable that should be positive and significant to explain the manufacturing industry. Further, as per Eqs. 3 and 4 β 3 is the coefficient of the dummy variable.

EMPIRICAL RESULTS
This section provides descriptive statistics of selected variables, correlation analysis, and results of pooled regression. Table 2 reports the descriptive statistics, such as mean, standard deviation, minimum, and maximum.   34. This shows that the companies in the manufacturing and insurance industries are of different sizes (small and large). The dispersion is also high. The leverage has a mean of 0.44, which shows that the companies under both the sectors hold 44% of debt in their capital structure, which is less than 50%, and has low dispersion.  Table 3 reports the correlation between the dependent and independent variables. The correlation ranges from -1 to 1. The correlation analysis

Regression analysis
This sub-section reports pooled regression results, estimated under Models 1, 2, 3, and 4. Since the Leverage is insignificant in Models 1 and 2, the study estimated Models 3 and 4 by eliminating Leverage as a control variable.

DISCUSSION
The current study examines the impact of operating cash flows on insurance and manufacturing sectors' financial performance in Saudi Arabia. The results reported in the previous sub-section show that the operating cash flow has a positive impact on the financial performance (ROA and ROE) of both the insurance and manufacturing sectors. This demonstrates that an increase in cash flows in these sectors shall enhance their financial performance. Further, the companies in these sectors are maintaining sufficient assets and effectively utilizing them. The result is consistent with the studies of Ogbeide and Akanji (2017) Therefore, the results discussed above confirm that the firms' operating cash flows in the insurance and manufacturing sectors in Saudi Arabia affect profitability. This shows that the cash inflow in these sectors is more than the cash outflow, as evidenced in the summary statistics.

CONCLUSION
Every firm's important concern is to evaluate its financial performance, which in turn depends upon the effective utilization of cash flows. To improve the efficiency and effectiveness in management decisions in terms of financial planning, the cash flow statement plays a significant role. Moreover, the Kingdom of Saudi Arabia is venturing at a rapid pace to transform its economy from oil to non-oil sector, and further plans are prepared to advance the manufacturing sector. Therefore, it becomes significant to examine the impact of operating cash flows on companies' financial performance in the insurance and manufacturing sectors. The study considered ROA and ROE as dependent variables, CFOs as an independent variable, SIZE and LEV as control variables, and a dummy variable to recognize the sectors. The results report a positive and significant association between financial performance (ROA and ROE) and operating cash flows (CFOs), demonstrating an increase in financial performance due to an increase in cash flows and vice versa. The control variables, such as SIZE and LEV, are negatively associated with financial performance. The dummy variable, which differentiates between the insurance and manufacturing industry, is negatively associated with financial performance (ROA). Therefore, it can be concluded that the firms' operating cash