## What is the meaning of negative working capital?

The term negative working capital is derived from the concept of working capital. To begin with, I would like to briefly explain the meaning of working capital. In simple terms, Working Capital refers to the total amount of current assets excluding the total amount of current liabilities in a busineRead more

The term negative working capital is derived from the concept of working capital. To begin with, I would like to briefly explain the meaning of working capital.

In simple terms, Working Capital refers to the total amount of current assets excluding the total amount of current liabilities in a business. It can have a positive or a negative value, wherein the two are an indicator of the well-being of a business. The formula to calculate working capital is as follows:

 WORKING CAPITAL  = TOTAL CURRENT ASSETS – TOTAL CURRENT LIABILITIES

# Negative Working Capital

In simple words, Negative working capital refers to the excess of net current liabilities over the net current assets. As the word itself suggests, a ‘negative’ working portrays a downfall in the financial position of a business and its inefficient functioning. A company is said to be facing financial difficulty and is not in a position to pay off its debts when the value of working capital is negative.

 NEGATIVE WORKING CAPITAL  = TOTAL CURRENT LIABILITIES > TOTAL CURRENT ASSETS

## EXAMPLE

Calculate the working capital of XYZ Ltd.

(Extract of Balance Sheet)

 PARTICULARS AMOUNT CURRENT ASSETS Cash and Cash Equivalents 36,000 Accounts Receivables 20,000 Stock Inventory 15,000 Marketable Securities 35,000 Prepaid Rent 7,000 TOTAL CURRENT ASSETS 1,13,000 CURRENT LIABILITIES Accounts Payable 15,000 Accrued Expense 4,000 Deferred Revenue 40,000 Taxes Payable 50,000 Short – Term Debt 10,000 Interest Payable 7,000 TOTAL CURRENT LIABILITIES 1,26,000

Note: As we can see the total current liabilities of XYZ Ltd. are exceeding the total current assets therefore, the working capital is negative.

Working capital = Total current assets – Total current liabilities

= 1,13,000 – 1,26,000

= (13,000)

Hope this helps.

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