Why adequate working capital is required in business or firms

Working Capital Required Should be Adequate and Should not be Excessive

          It is advised that management is asked to maintain the adequate working capital to run the business operations smoothly. Inadequate Working Capital Leads to inefficiency and consequently decrease the profitability of the business. The disadvantages of inadequate working capital are

§       It causes the firm unable to get the special attractive discounts from suppliers.

§       The firm loses the creditworthiness as it cannot meet the short term obligations in time.

§       It becomes difficult for business to grow as a result of high profitable project cannot be taken up due to inadequate working capital.

§     The operating efficiency comes down as there will be interruption in production due to inadequate working capital which results in reducing the profits of the business or company overall.

                 Now lets us see excessive working capital leads to

§     As a result of unnecessary accumulation of inventories as a result of which inventory mismanagement, theft, accumulation of old items which ultimately leads to discard at lower prices comes into picture.

§     There may be excessively liberal credit policy and slack in collection which will lead to increase in bad debts.

§  Excessive Working Capital makes management self-satisfied ultimately leads to managerial inefficiency.

§      It can also lead to speculative changes too.