When is negative working capital okay?

Negative working capital is a mathematical result when comparing current assets with current liabilities and the latter exceeds the first in number. That is you’ve got more liabilities than you’ve got assets to cover those liabilities in the next coming 12 months.

When thinking about it, negative is never a good thing. At least that’s how you’d normally go about that. However, there are situations when negative working capital isn’t necessarily bad: 

  • When those liabilities are partly recognized for a future considerable receivable / money coming in during the next 12 months and it’s not currently part of your assets;
  • When your business cycle is set so that you claim your receivables from your customers in less time than you have to pay to your suppliers;
  • When you don’t have receivables, that is your paid on spot, but you pay to your suppliers over a period of time.

There are types of businesses and cycles where it’s normal and to be expected that the current liabilities exceed current assets so there’s no need to think your business is going bad. Matter of fact is that sometimes people who don’t know this, may say that you’re going bankruptcy pretty soon because you don’t have funds to cover for your liabilities. Important thing is that you ought to know better your own business.