The amount of working capital should be sufficient. Inadequate amount of working capital may create a lot of financial problems in business. Sometimes, inadequate working capital may be the major causes for closing down the business organization. Due to shortage of working capital, raw materials can not be purchased on time and payment of labor and other expenses can not be made on time. The disadvantages suffered by a firm with insufficient working capital are as follows:
1. The firm is unable to take advantages of new opportunities or adapt to change.
2. Trade discounts are lost. A firm with sufficient working capital is able to finance larger stocks and can therefore place large orders.
3. Cash discounts are lost. Some firms will try to persuade their debtors to pay early by offering cash discounts.
4. The advantages of being able to offer a credit line to customers are forgone.
5. Financial reputation is lost due to non-payment of trade creditors on time.
6. Creditors may apply to the court for winding up if the firm fails to pay their obligations on time.
