What may happen if an organization neglected to manage its working capital?
Working capital is especially important for businesses that sell products because they need a well-stocked inventory. [ If your working capital is low, you may not have enough cash flow to replenish your inventory before running out of products. In such a case, client satisfaction and sales will suffer. On the other hand, organizations that mainly provide services may have
to hold little or no inventory and can operate with less working capital.
If your working capital is too low, the smallest emergency or unexpected expense can leave your business with no liquidity. This means you may not have enough cash on hand to pay for wages, utility bills and other regular running expenses. Workers will usually resent working without pay and utility companies make a habit of disconnecting clients who don't pay their bills.
If your working capital is less than your running expenses, you will fall behind in your mortgage payments, telephone bills, line of credit costs and other basic expenses. Lenders and service providers will start charging penalties and interest on the money you owe, which won't help your working capital situation. If you fail to fix your working capital issues and continue to miss payments, service providers may cancel their services altogether.
The final outcome for an organization that does not manage its working capital and cannot pay for its debts and other running expenses is bankruptcy. Even if the company has enough assets to pay its creditors, if the money is not at hand, the organization might have to sell its assets or even declare bankruptcy to cover its debts. ]
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