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Consequences of Over Assessment of Working Capital

Overassessment of working capital can lead to several negative consequences: it may result in unnecessary inventory accumulation; too liberal credit terms and poor cash recovery; and management complacency and inefficiency. It can also make capital less productive and reduce returns by over-investing in working capital. Working capital requires efficient management and control of its components to optimize profit.

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Ashish Agarwal
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45 views2 pages

Consequences of Over Assessment of Working Capital

Overassessment of working capital can lead to several negative consequences: it may result in unnecessary inventory accumulation; too liberal credit terms and poor cash recovery; and management complacency and inefficiency. It can also make capital less productive and reduce returns by over-investing in working capital. Working capital requires efficient management and control of its components to optimize profit.

Uploaded by

Ashish Agarwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CONSEQUENCES OF OVER ASSESSMENT OF

WORKING CAPITAL

a) Excess of working capital may result in unnecessary accumulation of inventories.


b) It may lead to offer too liberal credit terms to buyers and very poor recovery system and
cash management.
c) It may make management complacent leading to its inefficiency.
d) Over-investment in working capital makes capital less productive and may reduce return
on investment.

Working capital is very essential for success of a business so it requires efficient


management and control. Each of the components of the working capital needs proper
management to optimize profit.

WORKING CAPITAL CYCLE

Under this “Working capital is represented by the excess of current assets over
current liabilities identifying the relatively liquid portion of the total enterprise capital
which constitutes a margin for meeting obligation within the ordinary operating cycle of
the business”

The duration or time required to complete the sequence of events right from purchase of raw
materials / goods for cash to the realization of sales in cash is called the Working Capital Cycle.

During this cycle, capital converted from one form to another form such as cash----------raw
material----------finished goods----------debtors or bill receivable----------cash.

Working capital cycle also called circulating capital. The speed with which the working cycle
completes one cycle determines the requirements of working capital. Longer the cycle larger is
the requirement of working capital.

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