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Negative Working Capital - K. K. ADVISORS

Working capital is typically defined as current assets less current liabilities.  In banking, working capital is normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt).

Working capital is typically defined as current assets less current liabilities.  In banking, working capital is normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding interest-bearing debt).

 

It tells the financial statement user how much cash is tied up in the business through items such as receivables and inventories and also how much cash is going to be needed to pay off short term obligations in the next 12 months

 

Can we have Negative working capital?

 

Negative working capital varies from industry to industry as it signals different financial progress. Retail or restaurant industry shows a sign of efficiency with low receivables as customers pay upfront, inventory moves relatively quickly but suppliers often give weekly or monthly credits.  This means that the company receives cash from customers before it needs the cash to pay to the suppliers. In other industries, negative working capital may point a company is facing financial trouble.

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