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Hello sir ,
i have watched you vid about working capital but i still get confuse of how come overcapitalisation means working capital is too highAs what i know , overtrading is the one that referred to working capital is too high because as the businesss is rapidly growing
-high level of inventory is tied up
-high level of receivable as the sales volume get high , and
-the amount of payable is increasingWould you mind to help me ?
Thanks in advanceOvercapitalisation is when there is more long-term borrowing (whether from shareholders or from debt borrowing such as bonds) than there really needs to be.
The long-term finance is needed to cover both the non-current assets and the working capital (the net current assets).
If the working capital is higher than it should be then the long-term finance is higher that it should be, and there is then over-capitalisation.
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