What is Negative Working Capital?

Negative working capital occurs when a business has more current liabilities than current assets. This situation can be a cause for concern for lenders and creditors, since the firm may not have sufficient liquid assets to pay for its short-term obligations. However, there are several situations in which this is not a problem, including the following:

If an organization has a line of credit, it can readily draw down the line to pay for liabilities as they come due.
If an organization sells longer-term subscriptions, it may have a large liability for unearned subscriptions that does not reflect its immediate payment obligations.
If an organization is paid in cash, but has long payment terms with its suppliers, there can be a perceived imbalance between current assets and current liabilities, even though the business is fundamentally healthy.

Advantages of Negative Working Capital

Negative working capital can be useful when a business receives cash from its customers before it has to pay its suppliers. This situation arises when customers are required to pay on extremely short payment terms (such as cash in advance), while suppliers are allowing longer payment terms for the goods and services that they provide to the company (such as being paid in 30 days). In this situation, a business can grow quite rapidly, because it does not need to invest in a large amount of working capital - which is the more common condition.