Negative Net Working Capital in Plain English

Negative Net Working Capital is a topic that causes lots of confusion….but it doesn’t need to be complicated. In this video, we offer a simple visual, and plain English explanation of Negative Net Working Capital. Watch this video so you can nail your interview and land the job!
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This video can help you answer common interview questions like:
-What is Negative Net Working Capital?
-How can a company have Negative Net Working Capital?
-What is the impact to cash from Negative Net Working Capital?
-What has to be true about Current Assets and Current Liabilities if a company has Negative Net Working Capital?
-Would a software business with significant customer prepayments (i.e. Deferred Revenue) have Positive or Negative Net Working Capital?
We regularly post new Investment Banking and Private Equity Interview Questions on LinkedIn ( / finance-able ) and Twitter (@financeable1) to help you prepare. Follow our channels and you’ll be ready to nail your next Finance interview.
Learn how to answer interview questions from a former Investment Banking (UBS LA), Private Equity (Golden Gate Capital + HIG Capital) and Investment Management ($200B Mutual Fund / $2B Hedge Fund) practitioner…and Adjunct Professor in Columbia Business School’s Value Investing Program who has trained thousands of current IB/PE/HF/MF professionals.
Contents:
00:00 - Intro
00:40 - Positive vs Negative Net Working Capital
01:21 - Simple Net Working Capital Explanation: Pizza Shop
03:57 - Working Capital Rule of Thumb: Current Assets vs Current Liabilities
04:32 - Negative Net Working Capital Example: Growing Business
06:05 - Negative Net Working Capital Example: Declining Business
07:40 - Negative Net Working Capital Rule of Thumb:
08:25 - Negative Net Working Capital Recap
Hope this is helpful and let us know if you have any questions in the comment section below.
#NegativeNetWorkingCapital #NegativeWorkingCapital #InvestmentBanking #HedgeFunds #FinanceInterviews #DCF #Accounting
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[@enemyonscythe]

Thanks for the info. This is great!

[@Retumn98716]

Very good video, concise with easy to understand examples illustrated. Thank you very much!

[@FinanceableTraining]

Thanks so much! Glad it was helpful!

[@marekb.8435]

Thank you so much for your detailed explanation!

[@FinanceableTraining]

Pleased to hear that! Check out my other videos too. Thanks!

[@adityavishwakarma237]

nice topic! thank you

[@yeabsirasefr6209]

Very insightful, thank you.

[@FinanceableTraining]

Glad you found it helpful!

[@alitahsili]

Very helpful, Thank you.

[@FinanceableTraining]

Glad you found it helpful!

[@nathanheide8937]

Super helpful Rule of Thumb framework for understanding positive and negative NWC in growing or declining biz

[@FinanceableTraining]

Glad it was helpful!

[@is0sceles]

If a rent payment isn't due in 24 months, wouldn't that be a non-current liability? Why would it count toward current liabilities rather than non-current?

[@jd5787]

Cool video, thanks for sharing. In the case of tech M&A, how would you deal with deferred revenue in the context of working capital adjustments? I assume the seller would wants DRs to be part of the WC instead of being counted as a loabolit66so that it is not a $ for $ offset against the valuation. Am I correct? Would all the DRs be included or some would be excluded from WC adjustments? (1 year prepaid vs multi year prepaid deals for instance). Thank you

[@FinanceableTraining]

Hey @jd. Sorry for the delay here. www.loom.com/share/844dedf4152c4a509b6d8679358f1c91

[@lun4rd409]

hi, I can't find the same formula on each video : I tried to compute the NWC of Apple for 2023 FY : CA - CL = 143,566M - 145,308M = -1,742M.
Does it write ? Is there other ways to compute it ?
Thanks.

[@FinanceableTraining]

recorded a quick video for you here
@lun4rd409 : www.loom.com/share/41b70e72639440158fa38905bf35e34d?sid=7e56853d-ed78-4a7d-92a1-82b670a07401

[@imsophat990]

I have a small business how can i utilized the advantages of negative work capital if im experiencing it?

[@FinanceableTraining]

Hey there, sorry for the delay. In short, the typical way that this concept is utilized by small business is via pre-payments. For example, starting a subscription service where customers pay in advance. You see this a lot with small Software businesses. Hope that helps!

[@imsophat990]

@@FinanceableTraining thank you ❤️

[@SuprajaPochampally-f9v]

But what about liabilities like short term liabilities like loan repayments etc.

[@tsr6401]

thats not part of the working capital definition (i.e. they dont have anything to do with the 'operation' of the business)

[@SuprajaPochampally-f9v]

@@tsr6401 Thank you

[@sg.guruji9131]

if nagative net working increase than change in working capital positive ?

[@FinanceableTraining]

In short, that's correct. If a company with a negative NWC balance has an increase in that negative balance from one period to the next, it will result in an inflow of cash to the company.

[@sg.guruji9131]

@@FinanceableTraining thank you very much

[@FinanceableTraining]

Aiming for Investment Banking, Private Equity, or Investment Management Roles? Ramp up faster with our (free) Finance Analyst Starter Kit! - finance-able.com/analyst-starter-kit/ or check out our courses at courses.finance-able.com/

[@FinanceableTraining]

Glad you found it helpful!