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.

Related Courses

The Interpretation of Financial Statements 
Working Capital Management