What is negative working capital?



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but if company collects cash from their customers, d receivable balance goes down, and cash balance goes up. in short it wont affect overall current assets. than how working capital can go negative?????suppose i buy inventory of rs 1000 on credit for 30 days..i sell d same after procesing to my customers on 15 days credit for 1200..so my accounts payable balance will be 1000, and accounts receivable balance is 1200. on 15th day when i receive cash, my receivable balance will be nil and my cash balance will be 1200..but overall current assets remains same...so how does working capital turns negative????

1 Answer(s)


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Negative working capital is result of a situation were a company does not need enough cash balance to pay of its accounts payables. For example, take Dominos Pizza - assume they bought pizza ingredients from suppliers for Rs.1,000 with a 30 day credit. Within those 30 days, dominos will use the ingredients to make the pizza, sell it, get instant cash from customer and pay back the supplier. So in that 30 day period current liabilities will be higher than current assets, hence leading to negative working capital (working capital is defined as current assets - current liabilities).

Let me know if that makes sense

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