Excess working capital is defined as having more working capital on hand than is actually required.

One
of the drawbacks of excess working capital is that the company cannot obtain a suitable rate of return
on its investment because surplus capital earns nothing for the company while earnings are divided
throughout the whole capital base. As a result, shareholders receive a lower rate of return on their
investment. The second commercial limitation is that it leads to the wasteful purchasing of large
quantities of inventory. As a result, there is more inventory mishandling, theft, waste and losses. Excess
cash may encourage management to engage in speculative operations, resulting in additional losses for
the organization. Excess working capital undermines the control of turnover ratios, which are typically
utilized to run a successful business. It also obliterates any other signs and guidance used in running a
firm.

Working capital constraints limit the ability to make and implement decisions swiftly. For example, if
management wants to diversify its products, it may have to wait for more cash flow or sell assets. This
can result in the loss of vital assets or the postponement of activities. The inability to move fast on
strategic movements is a concern in constantly expanding sectors. It's possible that the company will slip
behind competitors with more liquid assets to invest in commercial ventures. The inefficiency with
which the business collects payments on accounts from consumers is caused by a lack of working
capital. Slower collection times may result in fewer funds on hand when invoices are due. Managers are
under more pressure to impose stricter payment obligations on clients, including fines for late
payments. This may have a detrimental impact on relationships with top customers who lack the funds
necessary to make prompt account payments.