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Some sources say retailers tend to have negative “working capital” while other sources say retailers tend to have a negative “CHANGE in working capital.” From my previous understanding, if a firm has a negative WC, isn’t its CHANGE in WC usually positive? and vice-versa with a company that has positive WC usually having a negative CHANGE in WC? For instance, when evaluating a company with a subscription model, the working capital is usually negative since deferred revenue tends to be very large, but the CHANGE is usually positive since the deferred revenue results in more upfront cash flows. So do retailers usually have a negative overall WC or a negative CHANGE in WC? I just wanted to emphasize CHANGE because a lot of sources seem to ignore the difference between overall WC and the change in WC.
Thanks for the help!
I like the example of a supermarket. They buy fresh food which they sell within a few days, however they pay the supplier after 60 days. Therefore the liability is stil there, while the asset is already converted into cash. Low inventory compared to high liabilities --> negative working capital.
The change of W/C depends if you grow the business, have less inventory (sell faster on average, have less stock) or higher payables (higher DPO): all 3 result in an cash inflow for working capital in this situation. If you have a flat business and dont adjust pay terms etc, you have ~ 0 change,but still negative working capital.
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