alleryStart learning →Why can an excessively high net working capital be a problem?
AIt can mean too much profit
BIt can mean too little cash
CIt can mean too many staff
DIt can mean too few vendors
Answer & Solution
Correct answer: B. It can mean too little cash
1. More working capital is not always better.
2. Money parked in receivables and inventory is money not earning a return.
3. Excessively high net working capital could mean too little cash.
4. That carries an opportunity cost against alternative investments.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 19 'The Importance of Trade Credit and Working Capital in Planning', sections 19.1-19.5_
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