What is negative working capital?


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m not clear with concept of negative working capital..how its good in dominos case???can u point out some examples for situation where negative working capital is a good thing...

3 Answer(s)


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Negative working capital very simply refers to a situation were the company gets paid by customers before the company has to pay its suppliers. Its a common thing in the restaurant business were restaurants have 15-30 days credit period with their suppliers (vegetables, cheese etc etc). But customers pay immediately, hence the company can pay suppliers after the product is sold and it has collected cash.

Such a situation is very beneficial from a cash standpoint since such company's can generate cash rapidly at scale.

On the contrary in a business like clothing retail, customers might buy a product only long after payments to suppliers are due.

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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????

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Working Capital is current Assets - Current Liabilities. If its going into negative then looks like its going into bankruptcy. But there are companies like Dominos still running well under negative working capital.
Really depends on the kind of business you are in.