What does negative working capital mean? Is that a bad sign?

Here’s a quick refresh on Working Capital.

Negative Working Capital can be a bad thing, but not always. Let’s think about a few scenarios.

SaaS business that sells long-term subscriptions paid up front

If they sell long-term subscriptions that are paid up front, this means that they can’t recognize revenue for all of the cash received up front. So, this business will have a high Deferred Revenue balance, since they’re waiting to recognize the revenue.

Retail companies where customers pay up front

Think about your local grocery store where you pay up front. This business likely keeps a very small cash balance and uses their cash to pay off their Accounts Payable balance. In this case, it is a sign of efficiency.

Nearly bankrupt company that doesn’t collect quickly and has loads of debt

Let’s say a company struggles to get customers to pay quickly and as a result has a weak cash balance. Now let’s also say that they have a high debt balance. You can see why that would be a bad combo.