As in the previous scenario, with negative changes in non-cash working capital, there is no reason why firms cannot continue to use supplier credit as a source of capital in the short term. Working capital can be either positive or negative. However, a negative working capital is … Situation for Negative Working Capital Abnormal Loss in Inventory. Financing Growth and Working Capital. In the long term, however, we should not assume that non-cash working capital will … Retail and restaurant companies like Amazon, Wal-Mart, and McDonald's often have negative Working Capital because customers pay upfront - so they can use the cash generated to pay off their Accounts Payable rather than keeping a large cash balance on-hand. Negative working capital is when the current liabilities exceed the current assets, and the working capital is negative. Therefore, in the case of a negative WC, the working capital ratio is lower than 1, indicating that the company faces a difficulty in meeting its financial obligations. In accounting terms, these companies, more specifically, have negative operating working capital, or negative capital after subtracting their current liabilities from their current accounts receivables and inventory. A negative figure often indicates financial distress and may be a sign of impending insolvency. But negative working capital can actually be a good thing for some high-turn businesses. Depending on the industry and cash payment cycles, having periods of negative working capital isn’t always bad. Negative working capital on a balance sheet normally means a company is not sufficiently liquid to pay its bills for the next 12 months and to sustain growth as well. Negative Working Capital . Negative working capital can be an advantage in business processes and disadvantages. Negative Working Capital Cycle. A negative working capital is an indication of poor management of cash flow and can occur due to abnormal damage to inventories or sale of goods at loss for a long period of time or a major debtor going bankrupt and you end up with a high bad debt balance. If the goods are lying in store for long and company is not able to sell, the value will deteriorate. Working capital is calculated by deducting current liabilities from current assets.   Working capital without the “operating” component typically includes securities that a company holds as part of its assets, which is why operating working capital gives a clearer picture of … This can be a sign of business efficiency. Negative working capital is the negative difference between the current assets and the current liabilities, suggesting that the current liabilities have covered the current assets by more than 100%. Negative working capital represents the situation when the company’s current liabilities exceed its current assets as stated on the firm’s balance sheet. Interpretation of Net Working Capital . In general most of the business complete this cycle by selling the inventory and to the customer and collection the amount of revenue from its routine customer, and then make settlement of payment with the passage of time. Software companies can, therefore, typically get by with very low, or even negative, working capital since they have very low upkeep costs and no … A company has negative working capital If the ratio of current assets to liabilities is less than one. If there is a loss in inventory due to wastage of material, fire in the store, theft, etc or any such reason which will diminish the value of inventory in the balance sheet will result in negative working capital. working capital cycle example. If the figure is positive you have positive working capital, if it is negative, you have negative working capital.