Negative Net Working Capital

In case this state persists for a long period of time, the business might be compelled to sell some of its long-term income yielding assets to pay for other needs such as payroll and AP. An expansion program without the help of investors or a new debt would be impossible if this state continues. Eventually, the falling net working capital would force the company into bankruptcy.

Assessing Both Sides

Remember that negative working capital is definitely worse than a positive one. However, this does not mean that the company is doomed. Instead, it is a warning sign that the short-term liquidity of your company is not in the best shape.

Note that positive working capital does not become useful if the business is not able to change its receivables or inventory into cash in a short duration. In technical terms, it might mean that the company has more current assets than current liabilities. However, this does not count if it is unable to pay its creditors in inventory. On the other hand, a negative working capital might not necessarily mean that the company is in a poor state if there are enough financing resources to meet its short-term needs.

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