What are the disadvantages of excessive working capital?
Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate or shortage of working capital.
Following are some of the disadvantages of having too much working capital.
- Excessive Working Capital means ideal funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments.
- 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.
- It may result into overall inefficiency in the organization.
- When there is excessive working capital, relations with banks and other financial institutions may not be maintained.
- Due to low rate of return on investments, the value of shares may also fall.
- The redundant working capital gives rise to speculative transactions.