situation in which the current liabilities of a firm exceed its current assets. Unless the condition is corrected, the firm may not be able to pay debts when due, threatening its ability to keep operating and possibly resulting in bankruptcy.
situation in which the current liabilities of a firm exceed its current assets. For example, if the total of cash, marketable securities, accounts receivable and notes receivable, inventory, and other current assets is less than the total of accounts payable, short-term notes payable, long-term debt due in one year, and other current liabilities, the firm has a negative working capital. Unless the condition is corrected, the firm will not be able to pay debts when due, threatening its ability to keep operating and possibly resulting in bankruptcy.
To remedy a negative working capital position, a firm has these alternatives: (1) it can convert a long-term asset into a current asset-for example, by selling a piece of equipment or a building, by liquidating a long-term investment, or by renegotiating a long-term loan receivable; (2) it can convert short-term liabilities into long-term liabilities-for example, by negotiating the substitution of a current account payable with a long-term note payable; (3) it can borrow long term; (4) it can obtain additional equity through a stock issue or other sources of paid-in capital; (5) it can retain or "plow back" profits.
