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.