Is it an alarming sign that a company encounters a negative working capital? First of all, this financial situation poses a danger to the balance of a company’s financial assets. But there are exceptions!
With the Higher Course of Financial Accounting You will be able to familiarize yourself with this and other essential economic concepts to understand the financial situation and treasury of a company. But before you take a look, in this article you will find the keys to negative working capital.
Negative working capital: what it is and its different situations
He working capital It is one of the magnitudes, a ratio, that serves the company to guarantee its survival, and in turn, increase its profitability. In other words, the working capital is the same as the rotation fund of the financial resources available to a company in the long term to be able to develop its activity in the short term.
If we subtract current liabilities from current assets, we have working capital as a result.
The calculation of working capital allows know the solvency of a company and its operational capacity. In this way, it will be possible to understand and work better in financial management, activity and accounting control. As a general rule they are three types of working capital:
- Equal to zero or zero working capitalwhen the current asset is financed in the long term and the company cannot meet its payment obligations.
- Positive working capitalwhen the current assets are greater than the current liabilities, that is, when the company can meet its obligations in the short and long term.
- Negative working capitalHere’s everything you need to know about Negative Working Capital!
Is it always harmful that it is negative? we analyze it
A company will have its accounting in good condition and with liquidity the greater its working capital. Traditionally, it is assumed that when a company has a negative working capital, it will not have sufficient resources to meet its immediate payment obligations. So we could deduce that this situation is a danger but, Is it always harmful that it is negative? Coming up next, we tell you!
It is logical to assume that if a company has immediate liquidity problems, It will also not be able to meet long-term obligations. Avoiding bankruptcy will be essential! A negative working capital implies that the company’s debts that mature in the short term are greater than the available liquidity. With the theoretical definition, it is logical to think that this technique is a danger to the accounting balance of the company and that that the working capital must always be positive. But there are exceptions!
we tell you the exception to the rule with a practical casethe one from a supermarket that you are more than likely to know first-hand.
Practical case: Mercadona example
There is no better way to understand financial theory than by explaining a real case. Mercadona, the food distribution chain, It will serve as an example to understand how a negative working capital really works. Here we go!
The payment term for Mercadona customers is immediate, either in cash or with credit/debit cards. This cash collection means that the supermarket always has cash assets in its treasury. On the other hand, the term of payment to its suppliers varies between two and five months. But this does not necessarily imply problems in your liquidity! With these collection and payment terms, Debt payment differs. You will always have cash solvency!
The possibility of extending the period between collections and payments, is the greatest advantage when working with a negative working capital. Having a long payment time, Mercadona ensures that it has liquidity to cover any unforeseen event that may arise. This liquidity also allows you self-finance and invest in improvementIt is as much about its own business structure and the departments that comprise it, as about the products it offers.
Companies with a national corporate organization chart, and international, such as other supermarket and hypermarket chains such as Carrefour, or companies in the textile sector such as Inditex, have exhaustive control over their accounting. This rigorous control allows them to work flexibly and safely with negative working capital. But this same tactic would be a very high risk for SMEs with little liquidityas they do not have payment slots for their clients so immediately.
Mercadona is not a particular case, many hypermarkets and commercial areas work with a negative working capital because it is the method that best adapts to the operations of the sector.
Learn more about Financial Accounting!
Maintaining the economic balance of a company requires accounting and finance experts who know how to react and predict imbalances in the treasury and financial assets.
With complementary training like the one you can find in the Higher Course of Financial Accounting You will be able to analyze the state of a company’s accounts. This program contemplates all the theoretical and practical aspects to study these assumptions. You will be able to access the agenda online, flexible and 100% adapted to your scheduleperfect to make compatible with studies or working hours!
Once you finish the practical preparatory exercises and the theory, you can take the exam to obtain the Sage 50C Premium Certification, through an official test carried out by Sage, a leading company in business management software. But these are not all the advantages! When you finish the training program, you can add a double degree to your curriculum Formation Diploma and an accrediting degree from the General Foundation of the University of Salamanca.