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Pays to be in red

Negative working capital can sometimes bring in cheap funds for a company...

Negative or low working capital (net current assets) is an undesirable attribute of a company. It means the company is facing a shortage of funds to meet its daily requirements and its ability to meet its debt or trade liability is questionable. But, it seems low working capital can sometimes spell profit too – at least for a few companies. Here is why.

If net current assets (excluding current investments) are negative due to below mentioned reasons then it gives access to interest-free funds for day to day operations and even an opportunity to earn interest on the surplus lying which has to be paid later. Only condition being that the company should be reputed enough and financially-strong to bargain with its suppliers.

One more method to check the efficiency is cash conversion cycle which means time taken to convert the raw material into a product, then selling it and realising the cash; Cash Conversion cycle = Inventory days + Receivable days - Payable days