It must be amply evident to us by now, that working capital has close relationship with day-to-day operations of a business. Inefficient working capital management may cause either shortage or excessive working capital; each of such situations is working capital is inadequate, a company faces the following problems:
- A company shall find it difficult to take advantage of profitable business opportunities due to shortage of funds.
- It is not possible for it to utilize production facilities fully and consequently thefirm’s profit goals shall not be achieved.
- A company shall not be able to take advantage of cash discount facilities.
- The credit-worthiness of the company shall be adversely affected, that is, the firm loses its reputation when it is not in a position to honour its short-term obligations.
- Fixed assets shall not be efficiently utilized due to lack of working fund for routine repairs and maintenance.
Too much working capital is as dangerous as too little of it. Excessive working capital raises the following problems:
- Excessive working capital in the form of very big inventories, increases the chances of inventory mishandling, waste and theft.
- It may lead to firms selling large quantity of goods on credit causing higher chances that more amount of money will be lost in form of bad debts.
- The company shall suffer from low profitability as its working capital is either not invested or is invested in low interest bearing securities.
Thus, we see that working capital management is like a tug-of-war between liquidity and profitability. A successful entrepreneur/manager, therefore, should keep the right balance between liquidity and profitability by maintaining the right amount of working capital on a continuous basis.
- A company shall find it difficult to take advantage of profitable business opportunities due to shortage of funds.
- It is not possible for it to utilize production facilities fully and consequently thefirm’s profit goals shall not be achieved.
- A company shall not be able to take advantage of cash discount facilities.
- The credit-worthiness of the company shall be adversely affected, that is, the firm loses its reputation when it is not in a position to honour its short-term obligations.
- Fixed assets shall not be efficiently utilized due to lack of working fund for routine repairs and maintenance.
Too much working capital is as dangerous as too little of it. Excessive working capital raises the following problems:
- Excessive working capital in the form of very big inventories, increases the chances of inventory mishandling, waste and theft.
- It may lead to firms selling large quantity of goods on credit causing higher chances that more amount of money will be lost in form of bad debts.
- The company shall suffer from low profitability as its working capital is either not invested or is invested in low interest bearing securities.
Thus, we see that working capital management is like a tug-of-war between liquidity and profitability. A successful entrepreneur/manager, therefore, should keep the right balance between liquidity and profitability by maintaining the right amount of working capital on a continuous basis.
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