12.4 Working capital management: profitability versus liquidity Flashcards
1
Q
Why is it problematic to hold too much working capital?
A
High levels of working capital means the entity has idle funds with unnecessary cost implications, known as overcapitalisation.
2
Q
What is meant by overcapitalisation?
A
A situation where the overall level of working capital is too high.
3
Q
What is overtrading?
A
A rapid increase in turnover not supported by sufficient working capital.
4
Q
What signs indicate overtrading?
A
- a rapid increase in revenue and the volume of current assets
- most of the increase in assets being financed by credit
- a dramatic drop in liquidity ratios
