Answer to Question #119525 in Accounting for Aditya Manohar

Question

working capital is the excess of current assets over current liabilities but companies like hul,godrej, bharti airtel, hero motocorp, faces the negative working capital in their operating life. thus their current lliabilities exceed their current assests in some years.what is your belief in this regard,can working capital ever be negative or zero for any company? if yes than what shall be the repercussions if a company has(a) dearth of working capital (b)overloades of working capital

Answer 1

Working capital can be zero or negative if the company's current assets are less than its current liabilities. Working capital is calculated as the difference between the company's current assets and current liabilities. If the company's current assets decrease significantly or there is an increase in current liabilities, the company's working capital may become negative.

(a) dearth of working capital - means that the company is unable to meet its obligations

Negative working capital means the appearance and development of negative trends in the functioning of the company. This may lead to a loss of financial stability and a downgrade of the investment rating. The indicator also indicates a high level of debt to creditors. The final result may be bankruptcy of the company.

(b)overloades of working capital:

problem accounts receivable

excess inventory of materials and finished products

high percentage of work in progress

The working capital of an enterprise is the company's own funds that are available for use and are in liquid form. The increase in working capital is not only the growth of accounts receivable, but also the appearance of additional inventory, the appearance of free cash on the current account. Often, the constant growth of working capital is associated with the appearance of doubtful debts, which negatively characterizes the financial position of the company. Thus, although the accounts receivable exceed the accounts payable, at the time of payment to suppliers and other creditors, there may not be any real cash on the firm's accounts. Therefore, the growth of non-monetary components of working capital creates, first of all, problems with liquidity.