Can negative working capital be a good thing?

Generally, having anything negative is not good, but in case of working capital it could be good as a company with negative working capital funds its growth in sales by effectively borrowing from its suppliers and customers. Such firms don’t supply goods on credit and constantly increase their sales.

What does negative working capital indicate?

What Does Negative Working Capital Mean? Negative working capital is when a company’s current liabilities exceed its current assets. This means that the liabilities that need to be paid within one year exceed the current assets that are monetizable over the same period.

What are the reasons for not holding less working capital?

Having too little WC impairs a company’s ability to meet it’s financial obligations. It is hard to pay expenses or debts that come due in the short-term. Having too much WC can also be bad because it means that there are assets that are not being invested.

How positive and negative working capital can be explained?

Positive working capital shows that your business has sufficient liquid assets to pay off immediate debts. By contrast, negative working capital shows that you would struggle to pay immediate debts if restricted only to your current assets.

What actions would reduce working capital?

Below are some of the tips that can shorten the working capital cycle.

• Faster collection of receivables. Start getting paid faster by offering discounts to clients to reward their prompt payment.
• Minimise inventory cycles.
• Extend payment terms.

What does a positive or negative working capital situation suggest about a company?

Which is better negative or positive working capital?

A positive working capital means that the company can pay off its short-term liabilities comfortably, while a negative figure obviously means that the company’s liabilities are high. However, since there are several exceptions to this rule, a negative working capital need not always be a bad thing.