What does negative working capital indicate about a company's cash management?

Negative working capital occurs when a company's current liabilities exceed its current assets. This situation can be indicative of efficient cash management in certain contexts, as it may suggest that the company is effectively managing its cash flow and turnover of inventory. For example, businesses in industries with quick inventory turnover, like retail or fast-paced services, may rely on short payment cycles and maintaining low levels of stock. As they quickly convert inventory into sales, they can operate successfully even with negative working capital.

This cash management strategy can reflect a firm’s ability to generate cash efficiently from its operations. By managing to keep liabilities higher than assets, the company may be ensuring that cash is quickly cycled back into the business through sales rather than being tied up in inventory or receivables. Thus, in certain business models, negative working capital does not necessarily indicate distress but rather an agile and effective cash management technique.