Positive Working Capital – Its Advantages and Disadvantages

Positive working capital is the excess of current assets over current liabilities. In other words, when the net working capital is a positive figure, it is said that the firm has a positive working capital. It is the situation when the short-term receivable of a company is more than its short-term payables. This is a desirable situation for the company it ensures no bankruptcy circumstances.

In the common business parlance, we generally understand working capital as positive working capital only. When does somebody ask how much is your working capital? Instantly, in the accountant’s mind, the equation of current assets less current liabilities would be calculated and he would give you the answer.

BENEFITS / ADVANTAGES OF POSITIVE WORKING CAPITAL(NWC)

Fight against Bankruptcy

It is an obvious fact that we should have more dollars in a pocket than the list of expenses we have planned. On the similar lines, from a liquidity and bankruptcy point of view, it is always desirable to have positive working capital. It ensures more incoming dollars than the planning of outgoing dollars. Positive Working Capital - Its Advantages and DisadvantagesIf the situation is reversed which is called negative working capital, the company may face liquidity issues and eventually lead to bankruptcy in case it is not able to satisfy its short-term debt/ payables.

Grab New Opportunities

A company with positive working capital is better positioned to take advantage of new business opportunities. Since the company has available supplier’s support and the additional funds also which are a prerequisite to encash the new opportunity.

Funds Availability from Banks

Under normal circumstances, banks fund only the working capital gap and not the whole current assets. Working capital gap means net working capital. If the gap between current assets and liabilities is positive, the bank is keen to fund otherwise not. As per banks, the company does not require funds.

Cheaper Financing

If the current assets are financed by the trade credit i.e. current liabilities, by forgoing the discount allowed. The cost of trade credit is normally higher compared to bank finance. It is desirable to take bank finance and avail the trade discount given by the supplier.

There is a host of other advantages, above are the important ones out of them.

DISADVANTAGES OF POSITIVE WORKING CAPITAL (NWC)

Dependency on Banks

Companies having positive working capital requires funds from the banks or financial institutions for running the operating cycle of their business. On the contrary, if the company is dependent upon the supplier’s for their business cycle, bank dependency is avoided. It is not necessary that the bank will definitely finance the working capital gap. They may have their own reservations on the same.

Cheaper Financing

If the Cost of Trade Credit is less than the bank finance, it is very obvious that the company will save on the cost of funds i.e. their interest cost and increase its profitability.

In essence, business to business the case of working capital should be analyzed. Most may have benefit in the positive working capital but for some negative working capital may be beneficial. Nothing should be avoided without even giving a thought on it.

Last updated on : March 30th, 2018
What’s your view on this? Share it in comments below.

Leave a Reply

Operating and Cash Operating Cycle
  • Invoice Discounting or Bill Discounting or Purchasing Bills
    Invoice or Bill Discounting or Purchasing Bills
  • Working Capital Estimation – Operating Cycle Method
    Working Capital Estimation – Operating Cycle Method
  • Working Capital Management Conservative Approach to Working Capital Financing Graphs
    Conservative Approach to Working Capital Financing
  • Permanent or Fixed Working Capital Graph
    Temporary or Variable Working Capital
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook


    Related pages


    constant payout ratio dividend policy exampleleasing vs purchasingwacc calculationdefinition of installment buyinghow to calculate cash and cash equivalentsmeaning of finance in hindiwhat is debiting an accountdebenture agreementwhat is the difference between notes payable and accounts payableinvoice discounting facilitytax treatment of finance leasessemi finished goods examplesdebit versus credit accountingmeaning of ramification in hindicash debt coverage ratio calculatortypes of financial covenantslc advising processadvantages and disadvantages of merger and acquisitiondiscounted profitability index dpidefinition of fixed capitalthe contribution margin per unit is equal to themeaning of bonds and debenturesupas letter of creditaccounting rate of return methodhow to calculate gross profit margin ratiofixed assets to long term liabilities ratiomodified internal rate of return formulainvoice factoring definitiondebit the giverfinance lease or contract hireinventories turnover ratiohow to calculate cost of common equitywacc weightsdifference between rent to own and owner financinghow is roce calculatedinventory sales ratiorationing definition economicstypes of intangible assetswhat is the purpose of double entry bookkeepingsecured debenturesadvantages of payback period methodpositive covenant bonddefinition of bills payableadvantages of payback periodrules of double entry system of accountingirredeemable convertible unsecured loan stockswhat does sweat equity meanequity growth rate formulanvp financenpv evaluationcapital lease cash flow statementwhat does credit and debit mean in accountingarbitrage theorytotal asset ratio formuladcf method of share valuationmanagerial uses of variance analysisytm calculation formulahow do i calculate irradvantages and disadvantages of buyback of sharesirr formulainstallment contract definitionadvantages and disadvantages portfolio managementcategories of manufacturing inventorysecured preference sharesthrough bill of lading definitionoverdraft facilities definitionwhat are quick assets in accountinggordans mathswhat is arbitrage pricing theoryactivity based budgeting exampledebits and credits examplesmeaning of bankruptcy in hindileveraged leasedividend growth model advantages and disadvantagesgordon dividend model