negative working capital

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purnima

purnima (Querist)
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01 July 2010 what are the repercussions for having a negative working capital in balance sheet in a particular year.

CA Kamal Gangaramani

CA Kamal Gangaramani (Expert)
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01 July 2010 Negative working capital will give the impression that you are financing your fixed asset from working capital, i.e. you are moving to cash cruch position.

Or you have withdrawn you working capital for personal expenditure and you will become bankrupt soon.

Or you have put some hawala purchase bill and you have no intention to clear the entries.

Rahul Gupta

Rahul Gupta (Expert)
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01 July 2010 Situation in which the current liabilities of a firm exceed its current assets. For example, if the total of cash, Marketable Securities, Accounts Receivable and notes receivable, inventory, and other current assets is less than the total of Accounts Payable short-term notes payable, long-term debt due in one year, and other current liabilities, the firm has a negative working capital. Unless the condition is corrected, the firm will not be able to pay debts when due, threatening its ability to keep operating and possibly resulting in bankruptcy.

To remedy a negative working capital position, a firm has these alternatives:
(1) it can convert a long-term asset into a current asset-for example, by selling a piece of equipment or a building, by liquidating a long-term investment, or by renegotiating a long-term loan receivable;
(2) it can convert short-term liabilities into long-term liabilities-for example, by negotiating the substitution of a current account payable with a long-term note payable;
(3) it can borrow long term;
(4) it can obtain additional equity through a stock issue or other sources of paid-in capital;
(5) it can retain or "plow back" profits.

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