Too Much Capital v Too Little Capital

Too Much Capital v Too Little Capital

Too much capital

One major disadvantage of holding excessive working capital is that it prompts one to make unnecessary purchases. Since there is a lot of money at one’s display, they are not constrained to a budget and may buy things that can do without or make excessive purchases. This encourages theft and leads to wastage and losses as the resources do not generate any income. for instance, when buying office equipment, a company will be prompted to buy more office chairs than needed. The excess chairs will be kept in the stores not being used. Too many pens can also be purchased, and workers could steal them. The company ends up going at a loss. Excessive funds may not be invested to earn more profits. It also gives the company confidence and a feeling of comfort that it doesn’t struggle to increase its returns (Kumar, n.d).

Too little capital

Too little capital means the company will strain financially. It will not afford to settle its short-term liabilities on time, which would even tarnish its reputation. The company will not even manage to fund its daily operations, which would slow down its productivity. Too little capital also makes it hard for the company to grow. It cannot even handle emergency operations. For instance, a company selling mattresses can get a deal for supplying a chain of hospitals with mattresses. The vendor requires a deposit of at least 70%, and the hospital states it will pay on delivery. The company is unable to take such a lifetime order, which would be a stepping stone to development. It is forced to make urgent loans, lest it will lose a good deal (Kumar, n.d).

References

Kumar, S. (n.d). Disadvantages of Excessive and Inadequate Working Capital. Financial analysis. Retrieved from http://www.yourarticlelibrary.com/accounting/working-capital-management/disadvantages-of-excessive-and-inadequate-working-capital-financial-analysis/68014