Financial Benefits of Incubators
The use of incubators is fairly common in startup companies. Entrepreneurs across the world use the services offered by incubators. This is because many entrepreneurs feel that being a part of a group that has similar objectives increases their chances of success. The use of incubators is fairly common in high-tech industries. In this article, […]
Can India Really Boycott Chinese Goods?
India and China are two of the fastest growing economies in the world. They are also neighbors and share a huge boundary spanning thousands of kilometers. However, they do not share an amicable relationship. India and China have fought a full-fledged war in 1962. Even after the war, skirmishes between the two emerging nations have […]
Advertisements and Public Relations
Advertising and public relations are two different industries altogether. Let us carefully examine the difference between advertisements and public relations: Organizations need to pay for every single advertisement aired on television/radio. Organizations need to buy space/slots in various newspapers, TV Channels, Radio Channels to advertise about their organization/product/service. Public relations experts strive hard to gain […]
Role of Managers in Employee Development
Employee development activities refer to steps taken by an organization in order to encourage employees to constantly enhance their skills with time and upgrade their existing knowledge. Knowledge upgradation is essential to cope with the changing times and unforeseen circumstances. You just cannot apply the same skills everywhere. One needs to keep himself/herself abreast with […]
External Causes of Organization Decline
Many theorists believe that organizational decay is caused by external factors. In fact, some have gone far enough to suggest the various stages in which this decline happens. However, the exact external causes are often difficult to understand. In this article, we will have a look at some of the most prominent causes of organizational […]
Traditional financial analysts would consider a negative working capital i.e. having more current liabilities than current assets, a sign of imminent danger. This view was deep rooted in the belief that a company must always have sufficient cash on hands to meet its short term liabilities failing which the credit will dry up and the company will get into a lot of trouble.
However, of late negative working capital has actually become a norm in many industries such as retail. There are thriving businesses such as Wal-Mart that have based their entire business strategies around negative working capital. This paradigm shift in the opinion about negative working capital is what makes it an interesting subject to read further about. This article will provide more details.
As per traditional analysis, investors would look at the current ratio of a company with negative working capital with great concern. As the current assets will be less than the current liabilities, this would signal imminent danger to them. The current ratio of such a company would be less than 1. However as we will see it is more than healthy.
In some businesses like in retail, inventory is taken from the suppliers on sale or return basis. This has become the norm after big ticket retailers such as Wal-Mart pretty much control the shelf space which in turn controls what people buy.
Suppliers of Wal-Mart therefore find Wal-Mart in a commanding position and therefore are more than happy to extend liberal trade terms. These terms state that Wal-Mart must make the payment for the purchases in 45 days if they are able to sell the inventory. In case they are not able to sell it, the suppliers will be more than happy to take the goods back.
Wal-Mart while on one hand has negotiated a 45 day credit for itself, sells to customers on cash. Assuming a period of 10-15 days to actually sell the inventory, Wal-Mart still has one full month of interest free cash for itself. They can use this cash for their treasury operations or to fund future growth of their company. In case they fail to sell the goods within 45 days, they just return the inventory or get an extension.
Hence, a negative working capital scenario has become beneficial for many companies who meet their operating expenses out of interest free credit extended by the suppliers.
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