What is a negative working capital?

Negative working capital is a situation where the company continues to operate, despite the fact that the obligations held by companies are more than available assets of the company. In principle, this means that accounts payable for the operation period are more than account receivables for the same period. Although it is not uncommon for the company to work with negative working capital for a short period, most companies do not have convertible assets to maintain operation in the long run if the situation does not turn.

The easiest way to find out whether the company is currently in a negative state capital state is to compare data on payable accounts for a recently closed accounting period with information information for the same period. If the receivables are more than obligations for this period, the company works in a positive situation in working capital. If the liabilities exceed the amount of receivables, then working capital is considered negative.

Many companies are experiencing an accounting period when there is a negative situation in working capital. In general, these are short -term situations that take place, because payments related to the sale generated in previous periods have not yet been received and published in receivables. At the same time, the costs are found in obligations and are waiting for disposition. When customers last for more than thirty days than outstanding invoices pay, the supplier often experiences one month when there is a negative working capital, then he enjoys positive working capital in the next month. When considering the entire operating year, it is usually found that the company works in black, with times when income exceeded the costs of offsetting months when the expenditure was higher than the income collected.

for businesses where negative working capital is not caused by a slower payment for outstanding invoices, steps to reduce expenditure or otherwise reconfigurate a business modelNost returned to a positive capital situation. For example, an enterprise may try to reduce the expenditure of the Ministry's budgets or by attempting to ensure lower prices for materials used in the production of goods and services. If this effort is not successful and the negative situation in working capital persists for a longer period of time, the company is very likely to stop operations. A possible exception is situations where the company has access to assets that can be transferred to cash and used to retire from the outstanding debt of the company, thereby reducing the amount of monthly payable at a level that is more in line with monthly claims.