CAF-7 · Chapter 12 · Question 10 of 15
A company holds massive amounts of inventory 'just in case', has extremely relaxed credit terms allowing customers 90 days to pay, and keeps millions in idle cash in a zero-interest bank account. This company is most likely suffering from:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Over-capitalization
Explanation
Over-capitalization occurs when a company has too much working capital tied up in idle cash, excessive inventory, and slow-paying receivables. While it means low risk of insolvency, it results in extremely poor returns on investment and lost profitability.
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