Evils of Excess or Inadequate Working Capital

Recently updated on April 13th, 2023 at 06:31 pm

When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses.

Excessive working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts.

Excessive Working Capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments.

It may result into overall inefficiency in the organisation.

When there is excessive working capital, relations with banks and other financial institutions may not be maintained.

The redundant working capital gives rise to speculative transactions.

Due to low rate of return on investments, the value of shares may also fall.

Disadvantages or Dangers of Inadequate Working Capital:

A concern which has inadequate working capital cannot pay its short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credit facilities.

It becomes difficult for the firm to exploit favourable market conditions and undertake profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business.

It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds.

It cannot buy its requirements in bulk and cannot avail of discounts, etc.

The rate of return on investments also falls with the shortage of working capital.

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