What are the disadvantages of inadequate working capital?

Both excess as well as short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital which is more dangerous from the point of view of the firm.

Following are some of the disadvantages of having too little working capital:

  1. 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.
  2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.
  3. It becomes difficult for the firm to exploit favourable market conditions and undertake profitable projects due to lack of working capital.
  4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business.
  5. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds.
  6. The rate of return on investments also falls with the shortage of working capital.

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