What is a potential consequence of having negative working capital?

Having negative working capital can lead to an inability to pay short-term liabilities, which is a significant concern for businesses. Working capital is defined as current assets minus current liabilities. When a company has negative working capital, it means that its current liabilities exceed its current assets. This situation can create cash flow problems, making it difficult for the company to meet its short-term obligations, such as paying suppliers, employees, and other creditors when they are due.

When a business finds itself with negative working capital, it may struggle to procure the necessary funds for operations, potentially leading to late payments or defaulting on obligations, which could further deteriorate its financial position. This creates a cycle where the company's reputation may be harmed, and relationships with creditors and suppliers could become strained.

In contrast, options suggesting increased cash reserves, enhanced credit ratings, or improved supplier relationships are not typically associated with negative working capital, as such a situation usually indicates financial distress rather than stability or growth.