"The concept of negative working capital is a sign of strong bargaining power," Comment and explain with an example.

Answer 6A(i) Concept of negative working capital is a sign of strong bargaining power. Negative working capital implies a situation where current liabilities are more than current assets. Generally, a negative working capital is a sign that an entity may be facing bankruptcy or serious financial problems. Poor working capital management could lead to increased borrowing and late payments to creditors. This could result in lower credit rating. Also, the entity may have to forego revenue growth opportunities due to lack of working capital. Another situation where a company can have negative working capital is where inventory is sold and cash generated in quick time. These are companies with the bargaining power to take advance against supply of goods or services or demand a slightly longer credit period from suppliers. Negative working capital can be a sign of managerial efficiency in a business with low inventory and accounts receivable. Low working capital requirements also imply a possible higher return on capital employed. Example: Suppose Wal-Mart orders 500,000 copies of a DVD to Warner Brothers and they were supposed to pay within 30 days. What if by the sixth or seventh day, Wal-Mart had already put the DVDs on the shelves of its stores across the country? By the twentieth day, they may have sold all of the DVDs. Here, Wal-Mart received the DVDs, shipped them to its stores, and sold them to the customer (making a profit in the process), all before they had paid Warner Brothers! If Wal-Mart can continue to do this with all of its suppliers, it doesn't really need to have enough cash on hand to pay all of its accounts payable. As long as the transactions are timed right, they can pay each bill as it comes due, maximizing their efficiency. The bottom line is that a negative working capital can also be a sign of managerial efficiency in a business with low inventory and accounts receivable (which means they operate on an almost strictly cash basis).