What is Inadequate working capital?
Inadequate working capital means shortage of working capital to meet the day to day operating activities of the business concern. In other words, the quantum of inadequate working capital is the difference between actual working capital and adequate working capital.
Disadvantages of Inadequate working capital:
The following are the dangers, limitations or disadvantages of inadequate working.
1. The growth of the business concern will be stagnated. The reason is that the business concern is not in a position to take up a profitable venture due to unavailability of working capital funds.
2. It affects the goodwill of the company.
3. The objectives of the business concern cannot be achieved. Moreover, average rate of return cannot be earned by the company.
4. The short term liabilities cannot be met in time.
5. Fixed assets cannot be used properly due to inadequate working capital.
6. The market opportunities like cash discount and trade discount cannot be availed by the business concern.
7. Sometimes, business opportunities are not utilized due to non availability of adequate working capital.
8. Production capacity is not used fully. It results in the low level of production. This leads to failure to meet the regular demands. Hence, the customers may switch over to some other products.
9. It directly affects the liquidity position of the business firm.
10. Whenever the goodwill of the company is affected, the credit worthiness of the company is decreased to some extent among the banks and financial institutions.