John Hay In: Category - Capital or EquityWhat is the meaning of negative working capital?negativeworking capital ShareFacebook1 AnswerVotedRecent Palaktripathi 2020-08-08T16:32:22+05:30Added an answer on August 8, 2020 at 4:32 pm 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 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 LIABILITIESNegative Working CapitalIn 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 ASSETSEXAMPLECalculate the working capital of XYZ Ltd.(Extract of Balance Sheet)PARTICULARSAMOUNTCURRENT ASSETSCash and Cash Equivalents36,000Accounts Receivables20,000Stock Inventory15,000Marketable Securities35,000Prepaid Rent7,000TOTAL CURRENT ASSETS1,13,000CURRENT LIABILITIESAccounts Payable15,000Accrued Expense4,000Deferred Revenue40,000Taxes Payable50,000Short – Term Debt10,000Interest Payable7,000TOTAL 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. 0Reply Share ShareShare on FacebookShare on TwitterShare on LinkedInShare on WhatsAppLeave an answerCancel replyYou must login or register to add a new answer.