Positive working capital and Negative working capital - Finance Ppl

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Positive working capital and Negative working capital

Positive working capital

When the company's Current assets are more than current liabilities, it is said to have a positive working capital.

  1. Positive working capital indicates that business has sufficient liquid assets to pay off its short term financial obligations and reflects on company's good financial position.
  2. But some situations, it also indicates an unfavourable financial position. Signifying operational inefficiency like a) too much of funds are locked in business in the form of excess Inventory. (non moving, obsolete) b) Long outstanding in debtors might be indicative of lower chance of its collection. c) Idle funds costing a higher opportunity cost.
Negative working capital:

Excess of current liabilities over current assets is known as negative of working capital.

  1. while a temporary negative working capital might not be an alarming situation, but a negative working capital steadily over long term, means that, the resources of the company even after realisation of current assets, is not sufficient enough to pay its debts and effectively operate the company.It is NOT a good sign of solvency of business.
  2. BUT, In special scenarios and in specific business like as in retail biz and cash-only sale businesses, the have negative working capital and is considered a favourable financial situation.
Example Cases of Negative working capital:
  1. Where there is usually quick movement of FG stock.
  2. Where the business generates cash quickly - customers pay on the spot (quick collection) even before invoices on supplies made by creditors/vendors becomes due.
  3. Better bargaining power (in terms of credit period) the business enjoys from its suppliers and thereby funding growth in sales, by effectively availing credit from vendors.