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Owner's Equity

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    Lince F.
    Lince F.

    There is an optimum amount for working capital and it may be too high or too low. Too high working capital means inefficient use of funds, reflected in excessive inventories, accounts receivable or cash. It may also indicate an inability to obtain shares on credit. A WC too low means the inability to take advantage of the credit conditions offered with the loss of discount. Companies are engaged in "hand-to-mouth" purchasing and may be forced to rely on bank overdrafts and other credits, which is costly. This ratio is easily manipulated. For example, long-term borrowing to repay short-term debts will improve the ratio without being beneficial to the company.

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