Healthy working capital is a good sign—until it isn’t. While many assume “the more, the better,” high working capital can actually hint at inefficiencies within a business.
What Is Working Capital?
Working capital is the difference between current assets (like cash, inventory, and receivables) and current liabilities (such as short-term debts and payables). It’s a measure of a company’s liquidity and short-term financial health.
But when it gets too high, it could suggest that resources are tied up rather than being used effectively.
What Does High Working Capital Say About A Company?
It could indicate:
1. Slow collections
A backlog of accounts receivable may look like asset strength, but it often points to delayed customer payments—cash that could otherwise be reinvested.
2. Excess inventory
Holding too much stock increases storage costs and ties up cash unnecessarily. It may also suggest supply chain or sales inefficiencies.
3. Underutilised cash
High levels of liquid assets sitting idle mean missed opportunities. That cash could be used for growth, R&D, or reducing debt.
The Hidden Risks Of High Working Capital
1. Lower returns on assets
High working capital can reduce overall efficiency if not managed well.
2. Reduced agility
In uncertain markets, tying up resources may limit a company’s ability to pivot quickly.
3. Inaccurate forecasting
Finally, overstated liquidity might hide underlying operational problems.
Improving Efficiency
Optimising accounts receivable processes is key. Tools that automate invoicing, track payment behaviour, and prioritise collections can help convert receivables into real cash faster. Better procurement planning and inventory control also help free up trapped capital.
High working capital doesn’t always mean strong performance. In fact, it’s often a sign that there’s room to improve how resources are managed. By turning assets into action, businesses can grow smarter—not just bigger.
Contact us to find out how our solutions can help your business achieve a balance.
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