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Shortage of working capital its influence on Business

Working capital is thought as the functioning liquidity open to a business, company or any other business entity. It is also part of your company's operating capital. A small business is reported to be liquidated when its current property tend to be than its current liabilities, but it could have a working capital insufficiency when its current liabilities are definitely more less the current assets.


Net Working Capital = Current belongings - Current liabilities.

To ensure that the a company can continue its procedure and that there is sufficient cash flow to satisfy both maturing short-term debt and upcoming operational bills, working capital should be well handled.

Working Capital Management

This is a strategy of maintaining efficient degrees of both aspects of working capital, current assets and current liabilities, in deference one to the other. Working capital management promises a company has sufficient cash flow to be able to meet its short-term debts work and operating bills.

Liquidity Cycle

Managing working capital is focused on making certain cash available for business (day-to-day) use is enough to meet cash requirements at any given time. This means having enough liquidity.

The management of working capital is a continuing process, such that when a business will take off production, it requires time to create income. Money to cover stock and other running costs will need to be found from the original capital committed to the business. As the business enterprise cycle proceeds, income from customers will be available to offset expenses.

Sufficient money are had a need to purchase additional expenditure before earnings revives. This constant process is known as Liquidity Cycle.

Credit Sales

Customers (Debtors) Pay up

Capital injected into a big firm

Purchase of Materials

Produced goods

Purposes of working capital management

To ensure a business firm has enough fund to meet short-term financial needs

To keep cash moving rapidly through the routine, so that there is enough money to make future orders

Effects of shortage of working capital

Insufficient working capital is the most typical reason behind business failing and liquidity. Many liquidity problems are due to the company not putting away sufficient more for working capital (resulting to a hand-to-mouth)


A firm with inadequate working capital will battle to pay its charges on time as it has no free cash and therefore resort to delaying payments which also affects suppliers. It may need to borrow more money to pay provider at high interest charge.


High additional cost of interest charges from lenders are mainly associated to borrowed funds. However, loan providers also find out and want to make certain or promised that their consumers are efficiently controlling their working capital problems before loans are granted

Missed opportunities

A company with lack of working capital will miss many income generating opportunities which range from incapability to exploit profitable investment opportunities to failure to buy materials in large.

Restricted present and future development or growth

Working capital lack will hinder the present and future growth and expansion of your business and can make a company unable to filled with its dominant competition in a competitive business environment

Causes of working capital shortage

There are two places where in fact the cause of the shortages of working capital could be recognized, and they are the Internal and exterior. These areas are tackled the following:

Internal causes

Production delays and interruption that do not make the completed good reach end users

Industrial strikes

Marketing problems which can be provoked by low demand of something and longer credit conditions aimed at moving unsold stocks

Managerial problems credited to poor stock management or creation management that can lead to additional costs.

External Causes

Changes to financial weather such as inflation, taxation, interest, recession

Demand decrease (semester) caused by changes in taste, fashion etc

Unexpected non-payment by customers resulting to bad debts.

Working capital control measures

To maintain a good liquidity ratio, a company should effectively/effectively manage the elements of its working capital such as; debtors, cash, companies, creditors etc. The following are measures taken up to take care of a firm's working capital and to avoid inadequate or shortage in the capital:


Establish a credit insurance policy with regards to normal credit periods and overall credit control

Establish a policy on individual credit (oblique) limit.

Debt collection management such as;

Prompt Invoicing

Offer discount to clients who pay on time

Issue monthly affirmation to debtors(as reminder)

Institute a powerful debt collection and control system

Collect overdue debt


Increase the range of goods and services bought on credit i. e. have a good credit rating

Don't over extend the period of time taken to pay debt

Collecting payments efficiently by increasing the portion of cash customers


Ensure an efficient production process

Minimising stock degrees of work in progress

Ensure goods are provided promptly

Minimising stocks and shares of finished

Minimising stock losses

Efficient inventory control


Use of cash-flow forecast

Plan for moments where you will see too little cash to avoid liquidity crisis

Cash planning and budgeting

Cash movement management

Accelerate fund movements among banks

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