These businesses might not be able to make ends meet, or they will turn to borrowing (incurring even more debt) to finance their operations. Financial Strugglesįor many businesses, poor financial management can lead to an ongoing cycle of negative working capital. Late payments or lengthy payment terms can create problems when the business needs to fulfill its own financial obligations before it has received payment. Many businesses struggle to have their own clients pay invoices on-time. This could include buying new equipment or products or making other investments designed to fuel future growth. Regardless of industry, it isn’t unusual for businesses to temporarily experience periods of negative working capital after making a large purchase. The businesses collect money at a fast rate from their sales - typically faster than the timeline for repaying bills to their suppliers. This includes businesses such as restaurants, grocery stores, and other retailers that don’t extend credit to buyers and have tight inventory control. Negative working capital is actually quite common in industries that experience high inventory turnover. The following are some of the most common reasons why a business might see its current liabilities exceed current assets. In some industries, negative working capital is actually quite normal, while in others, it’s a sign of financial management issues. There are several reasons why a company could experience negative working capital. Though long-term negative working capital is a problem, a negative change in working capital is a common occurrence and shouldn’t set off any alarm bells. While the answer to “can working capital be negative?” is a yes, it’s important to understand why a business owner might find themself in this predicament.
So when calculating net working capital, you would have a negative number after subtracting liabilities from assets. With the formula for calculating working capital in mind, negative working capital describes any situation where the business’s current liabilities are greater than its current assets. Working Capital Formula = (Total Current Assets – Total Current Liabilities) What Is Negative Working Capital? This will give you a dollar amount of your net working capital.
Then subtract your current short-term liabilities, such as payroll taxes and accounts payable. This does not include fixed assets that are less liquid, such as buildings or machinery. To measure your net working capital (or the amount of liquidity available to your business), add up your current short-term assets, which are your assets that could easily be liquidated, such as cash or inventory. How Do I Calculate Working Capital?įortunately, calculating your working capital is a straightforward process. By comparing assets and liabilities, you can determine if your company will be able to fulfill its financial obligations in the coming year and whether it can deal with market disruptions and other challenges. Working capital measures your business’s liquidity by subtracting current liabilities from current assets. What Is Working Capital?įirst, a quick recap on working capital. Continue reading for an in-depth breakdown. Understanding what it means when you’re in a period of negative working capital will help you make sound financial decisions. Small business owners in particular should regularly track working capital changes and monitor if they begin to experience consistent negative working capital.īut what is negative working capital, and can there actually be benefits to it? When it comes to having a complete understanding of the financial health of your business, few metrics are more important to stay on top of than working capital.