Negative versus Positive Working Capital
The more networking capital your business has, the stronger its immediate financial position would be.
Usually, businesses wish to avoid negative amounts in this area. However, for businesses which have a rapid inventory turnover, like grocery stores and fast-food chains, negative working capital is not necessarily an issue. These kinds of businesses transact with end-consumers and bring in liquid cash many times a day, so they do not have to stockpile a huge amount of WC.
Besides, businesses want to avoid a situation where working capital amount on hand is too much. That can suggest you are having excessive cash on hand, rather than investing previous profits back into your business. In addition, the kind of working capital which your business has mattered. Cash at the bank is more valuable than capital that is tied up in unsold inventory and unpaid invoices.
Negative working capital often means:
- That your business’s short-term liquidity is low,
- It does not have enough assets for paying off all short-term debts, or
- It is in a cash-flow negative state, meaning you cannot grow as quickly.
Positive working capital usually means:
- That your business’s short-term liquidity is good,
- That it has enough liquid assets including cash to pay off its short-term liabilities, or
- That its cash inflows exceed cash outflows. Being in a cash-flow positive state in the short term means your business can grow faster.