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

There are several notable advantages associated with having negative working capital, which are as follows:

Efficient use of capital. Having negative working capital often means that a company efficiently utilizes its working capital and does not have excess funds tied up in inventory or accounts receivable. By using supplier credit (accounts payable) as a primary source of funding, the company avoids needing to raise external financing.
Strong cash flow. Companies that receive payments from customers quickly—often before they pay suppliers—benefit from a steady cash inflow, which reduces the need to take on financing.
Reduced carrying costs. Maintaining lower inventory levels reduces the costs associated with storage, obsolescence, and insurance. Also, keeping accounts receivable low ensures faster collection and reduces bad debt risks.