Advantages of Negative Working Capital

The biggest advantage of negative working capital (NeWC) is the holiday from bank funding. It saves the interest cost by getting current assets funded by suppliers. It may also mean that the company is a cash-rich company whose operating cycle is fast and thereby the investment in finished goods is converted to cash before the due date of payment to suppliers.

Negative working capital (NeWC) is the negative difference between the current assets and current liabilities. It is the negative value of NWC. It is possible when current liabilities are more than current assets. This also implies that the whole of current assets are financed by the current liabilities and a portion of fixed asset is also financed by them. On the other hand, it may be understood that the portion of current liabilities other than current assets is invested in short-term investments to earn interest from them.

ADVANTAGES / BENEFITS OF NEGATIVE WORKING CAPITAL

Advantage of Negative Working Capital

It is not always bad to have negative working capital. A lot of giant companies with established brands have negative working capital because they are able to bargain very well with their suppliers. They have the muscle power of bulk demand.

Low Cost of Funding Current Assets

The first thing that would come to our mind is the interest cost of funds if funded by banks. It is because trade credit has no explicit interest cost. The funds are provided by the suppliers and the time limit to pay is also flexible to a great extent. This will depend on a company to company and supplier to supplier.

Cash Richness and Earnings from Investments

Companies having negative working capital may not always have fixed assets financed by current liabilities i.e. suppliers.

Some company may be smart enough who at one side negotiate hard with the suppliers to get credit and on the other side collect money from the customer faster. The money received from the customer is not paid to the supplier but are invested in short-term investments to earn interest. These companies not only save the interest cost of working capital but also earn some interest out of investments.

Must for Some Industries

Take example of companies like Amazon, eBay etc. They purchase goods on credit but sell the goods on cash and their inventory movement is also fast. The shelf life of the product is also not long. For such companies, it is obvious to have negative working capital. On the contrary, if the management is not able to achieve negative working capital, they would be considered inefficient. Similar is the case of retailers who purchase on credit but sell in cash. They also can develop free cash. Telecom companies are famous for having NeWC. 

Last updated on : September 18th, 2017

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