The company I am working in has Working Capital problems. My accountant told me the working capital problems are due to the decrease or lack or depletion of working capital. Can you please tell what could have caused such depletion or decrease in working capital?

Answer:

The lack or depletion of working capital are due to the following factors:

1.   The company has expanded too fast. By expanding too fast without increasing its working capital, this will further deplete the working capital of the company. This situation is also called “OVERTRADING” Click here To understand more about OVERTRADING

1.   Management do not think of ploughing back the cash generated from profit made and embarked on things like:

·     Excessive dividend payout

·     Over commitment to long term commitments like purchasing land, building, plant and machinery

1.   External factors can also contribute to the depletion or deterioration of working capital like for example drastic increase in raw material prices,higher labour costs due to strong union backing, changes in taxation payment dates,etc

Also read other related artices like:

Introduction, importance and objective of working capital management