why do companies prefer negative working capital as a source of finance?


2 Answer(s)


Good Profits does not necessarily means enough cash it can be in Accounts Receivables (not Cash!). Moreover it varies from Business to Business for e.g.
Bollywood movies the Current Liabilities exceeds Current Assets but after the movie is released & DVD sold the revenues in Cash or Accounts Receivables, until the company has negative Working Capital same in the case of Software Industry, etc.
However in case of Manufacturing of volatile products negative working capital is not a good sign.

Negaive working capital is good for a company as it indicates the reputation of the company & suppliers supply inventories on credit.
But if the payable amount is more than 5 times the inventory, then the company is in trouble.