Why is too much working capital a bad thing?

The global and domestic economy has been causing some concern recently, resulting in businesses being more hesitant with money than before.

This may see a rise in businesses holding onto working capital.

While there are merits to working capital, businesses should be aware of the danger of having too much working capital.

What is working capital?

The difference between your company’s current assets and liabilities is your working capital.

For the purposes of understanding your working capital, your assets are the things that can be easily quantified, like your inventory, as well as your accounts receivable and customers’ unpaid bills.

Your accounts payable and your outstanding debts are considered as your liabilities in these calculations.

Once determined, your working capital can be seen as a sign of the liquidity and short-term financial health of your business.

Why would too much working capital be a bad thing?

The dangers of too little working capital are more immediately apparent than having too much working capital.

Not having enough working capital means that a business will struggle to keep pace with its liabilities and could find bills going unpaid.

In that case, it may seem like having more working capital can empower your business to respond dynamically to any changes in economic situation.

However, excessive working capital can be a barrier to growth.

Working capital should be invested back into the business so that you can continue to grow and seek new opportunities for expansion.

When this desire to grow requires external funding from investors, having too much working capital will act as a barrier.

Investors are not likely to fund your business if they feel that you are lacking confidence in it.

Too much working capital is seen as a sign of unwillingness to invest that will be mirrored by external investors who will share your lack of confidence.

How can businesses keep the right amount of working capital?

Like Goldilocks, it is important to find the middle ground that is just right when considering your working capital.

You need to make sure you have enough working capital to adapt to economic challenges, but not so much that it becomes off-putting.

Getting professional financial advice is the most effective way to strike this happy medium when it comes to working capital.

We can support you in understanding the upcoming economic pressures that are likely to affect your business.

Armed with this knowledge, you can successfully budget to ensure that you know your long-term financial health and plan accordingly.

This ensures that you can effectively use your working capital to grow your business while still having a backup in case of difficulty.

Get more confident with handling your working capital by speaking to our team today.