Answer to Question #119528 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

A zero or even negative working capital is not bad in the short run, bit in the long run it is an indication of poor management of cash flow and can occur due to abnormal damage to inventories or sale of goods at loss for a long period of time or a major debtor going bankrupt and you end up with a high bad debt balance.

If a company has (a) dearth of working capital, then it should repay its loans, improve the time of the payments for goods or services sold, or get some additional assets.

(b) Overloades of working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts, so the company should sell some its inefficient assets or make some additional investment through increase in liabilities.