What is the effect of negative working capital on profitability.?

Question

i am writing a project on working capital of a company. The company had a negative working capital of about 1 billion Naira in 2005. I need specific locations where i can read more on negative working capital inorder to interprete the company's financial statement. Negative working capital is when current liabilities exceed current asset.

Answer 1

Negative working capital is not always bad. Some companies can generate cash so quickly they actually have a negative working capital. This is generally true of companies in the restaurant business (McDonalds had a negative working capital of $698.5 million between 1999 and 2000). Amazon.com is another example. This happens because customers pay upfront and so rapidly, the business has no problems raising cash. In these companies, products are delivered and sold to the customer before the company ever pays for them.

The bottom line: A negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis). In any other situation, it is a sign a company may be facing bankruptcy or serious financial trouble. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor - all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.

In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.

Answer 2

Negative Net Working Capital

Answer 3

Negative Working Capital