Question

How does a negative working capital (current assets-current liabilities) reflect on the management of receivables and inventory?

Answer 1

Working capital is computed as the difference between current asset's and current liabilities. When current liabilities exceed the current asset's then the business has negative working capital and indicates that a company is unable to pay off its short-term liabilities. It usually occurs when company generates cash so quickly that it can sell its goods to the customer before paying its bill to the supplier or vendor. In the meantime, it is technically using the supplier’s money to grow. The companies that deal with cash-only business have usually high turnover with negative working capital. Moreover it is not bad to have negative working capital. The management of receivables and inventory involves managing accounts receivable and payable, inventories, and cash. The impact of changes in working capital is shown in a firm's cash flow statement.