Positive Working Capital – Its Advantages and Disadvantages

Positive working capital is the excess of current assets over current liabilities. In other words, when the net working capital is a positive figure, it is said that the firm has a positive working capital. It is the situation when the short-term receivable of a company is more than its short-term payables. This is a desirable situation for the company it ensures no bankruptcy circumstances.

In the common business parlance, we generally understand working capital as positive working capital only. When does somebody ask how much is your working capital? Instantly, in the accountant’s mind, the equation of current assets less current liabilities would be calculated and he would give you the answer.

BENEFITS / ADVANTAGES OF POSITIVE WORKING CAPITAL(NWC)

Fight against Bankruptcy

It is an obvious fact that we should have more dollars in a pocket than the list of expenses we have planned. On the similar lines, from a liquidity and bankruptcy point of view, it is always desirable to have positive working capital. It ensures more incoming dollars than the planning of outgoing dollars. Positive Working Capital - Its Advantages and DisadvantagesIf the situation is reversed which is called negative working capital, the company may face liquidity issues and eventually lead to bankruptcy in case it is not able to satisfy its short-term debt/ payables.

Grab New Opportunities

A company with positive working capital is better positioned to take advantage of new business opportunities. Since the company has available supplier’s support and the additional funds also which are a prerequisite to encash the new opportunity.

Funds Availability from Banks

Under normal circumstances, banks fund only the working capital gap and not the whole current assets. Working capital gap means net working capital. If the gap between current assets and liabilities is positive, the bank is keen to fund otherwise not. As per banks, the company does not require funds.

Cheaper Financing

If the current assets are financed by the trade credit i.e. current liabilities, by forgoing the discount allowed. The cost of trade credit is normally higher compared to bank finance. It is desirable to take bank finance and avail the trade discount given by the supplier.

There is a host of other advantages, above are the important ones out of them.

DISADVANTAGES OF POSITIVE WORKING CAPITAL (NWC)

Dependency on Banks

Companies having positive working capital requires funds from the banks or financial institutions for running the operating cycle of their business. On the contrary, if the company is dependent upon the supplier’s for their business cycle, bank dependency is avoided. It is not necessary that the bank will definitely finance the working capital gap. They may have their own reservations on the same.

Cheaper Financing

If the Cost of Trade Credit is less than the bank finance, it is very obvious that the company will save on the cost of funds i.e. their interest cost and increase its profitability.

In essence, business to business the case of working capital should be analyzed. Most may have benefit in the positive working capital but for some negative working capital may be beneficial. Nothing should be avoided without even giving a thought on it.

Last updated on : March 30th, 2018

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