How can it be "good" for a company operate at a negative NWC?
How can it be "good" for a company operate at a negative net working capital (current assets - current liabialities). I tried looking this up and everything that comes up is about the company being able to generate cash faster than they have to pay back their suppliers. I understand this idea, but what I still don't understand is how that gives a company a negative NWC... or makes it "good."
Example:
Walmart buys oranges from supplier that they have to pay in 30 days. They sell all the oranges in one week. They use the cash to buy apples from a different supplier that they have to pay back in 30 days. They sell all the apples in one week. They use the cash from these sales to pay both the orange and apple suppliers.
What I don't understand is anywhere in that process where they had a negative NWC. Accounts payable would always be balanced by the inventory they purchased. I know I am missing something but I can't figure out what. Any help would be much appreciated.
Some thoughts..
Time value of money - Money now is worth more now than in the future. So if a company can collect cash sooner than it has to pay its liabilities, that's a positive.
Optionality - It seems to me that if the company can collect cash faster than it can pay suppliers/vendors, then it has relatively more optionality in how it uses its cash reserves. It can continue to fund growth by buying more inventory as in your example, but the company may also hold onto the cash, fund capex or acquisitions, hire more employees, etc.
It also matters why the NWC is negative. For example, a high deferred revenue balance would be viewed positively as it means the company is collecting cash before delivering services/products. A high accounts payable balance, suggesting the company owes a lot of money to suppliers/vendors, could be problematic if the company runs into operational issues and has trouble making the payments. So it's somewhat contextual and depends on what else is happening operationally.
Another point is that from a cash flow perspective, we typically think about the change in net working capital rather than NWC itself. If current operational liabilities are growing faster than current operational assets, then the company is generating more cash flow as a result of its growth rather than needing to spend in advance of growth.
Welcome any thoughts..
You’re using someone else’s money to fund your own operations. That’s pretty helpful if you can do that on a consistent basis
It doesn’t balance with inventory because you sold the oranges (and then the apples) right. So at some point in your example you’ll have 20 Cash 0 Inventory and 20 Trade payables, et voila without putting up own $$ you have 20 cash available for other purposes (or 10 if you want to finance another month of inventories & sales.
This is what I was going to say as well... Assuming that OP is correctly calculating NWC for this instance (no current cash or debt in the calculation), then NWC would be negative at the points where you have sold your inventory but still have accounts payable
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