Share

For the sake of quality, our forum is currently "Restricted" to invitation-only. In case if you wish to join our forum, please send an email seeking an invitation to "[email protected]".

Lost your password? Please enter your email address. You will receive a link and will create a new password via email.

This answer was edited.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 liabilitiesin a business. It can have apositiveor anegativevalue, 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 adownfall in the financial position of a businessandits inefficient functioning. A company is said to be facingfinancial difficultyand isnot in a position to pay off its debtswhen 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)

PARTICULARSAMOUNTCURRENT ASSETSTOTAL CURRENT ASSETS1,13,000CURRENT LIABILITIESTOTAL CURRENT LIABILITIES1,26,000Note: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.