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The Hidden Cost of Running Out of Working Capital

Published :Nov 2024

Just as a vehicle needs fuel to run, every business needs working capital. Imagine the panic and frustration of being stranded in the middle of a journey due to a lack of fuel, with your passengers – perhaps family or friends – stuck beside you. Now imagine that scenario at a much larger scale: a big company unable to “move forward” due to insufficient working capital. The impact is massive, far-reaching, and can cause more disruption than we realize.

In manufacturing, the consequences of poor working capital planning are especially harsh. An organization must be able to procure materials to keep its production line on track. Without funds to purchase materials, schedules fall apart. Suddenly, machines sit idle, and employees find themselves waiting for work. These costs might not make headlines or appear in immediate financials, but they are silently eroding profitability. Fixed expenses like depreciation and wages continue to pile up, unnoticed, while the Board remains blissfully unaware – until it is too late.

Some companies try to patch the problem by buying on credit, only to discover the repercussions of unpaid bills. When payment delays reach a certain point, vendors get cautious. Prices may increase, credit terms tighten, and suddenly the cost of keeping production alive soars – often beyond what a bank loan might have cost. Missed payments can strain valuable vendor relationships, impacting long-term supply chain health. And when the customer is left waiting for a delayed product, the company might face late delivery penalties or, worse, the risk of losing a client.

Avoiding these issues is essential, but the reality is that managing working capital is complex and differs across companies. There’s no one-size-fits-all solution; it takes experience and strategy to find the right approach.

After years of experience, I will be diving into the core elements of working capital management in future posts. Hopefully, these insights will help you avoid pitfalls and keep your business moving forward without getting stranded.

Stay tuned for upcoming posts as I explore the key elements of working capital and share practical tips on keeping the financial “engine” running smoothly.

For more discussions on consultation on this topic, please connect with verghese.oommen@camsconsulting.in / www.camsconsulting.in