The Implications of the Failure to Manage Working Capital Adequately.

Topics: Balance sheet, Inventory, Asset Pages: 1 (324 words) Published: April 29, 2012
The implications of the failure to manage working capital adequately. Working capital is defined as the day to day finances utilized by a firm. It is the firm’s current assets less its liabilities. Managing working capital is about ensuring that the business needs to be able to maintain the day-to-day expenses. A company cannot function without working capital and, if mismanaged, it can potentially lead to the company’s demise. Failure to adequately manage working capital can disrupt a business’ operations and profitability. Businesses may erroneously tie up too much cash in the form of stock. This can occur if the stock is perishable it may reach the end of its shelf life before it can be sold. If the stock comprises items that rapidly go out of fashion, the stock may lose majority or all of its value before it can be sold. If excessive cash is tied up in stock, it is not available for investment elsewhere in the business. The business may not possess sufficient stock to fulfil order resulting in potential customers to go elsewhere. Debtors may be too low or high and when these exist, the business is offering an inadequate level of credit to customers. In the case where debtors are too high, the business is not collecting cash quickly enough. Another implication that may become evident may be due to high or low creditors and from this resulting in a loss of goodwill towards the business. Finally when cash is too high or low, if the elements of working capital are mismanaged; the cash level is too low resulting in the firm to borrow cash and with this comes interest added to the borrowing. If the company has surplus cash, they will have to place the money on deposit where it can earn interest. Therefore a sound working capital management will allow maximization of profits and expansion to meet the demands of the company’s customers.
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