Which of the following is a reason negative working capital can occur?

• A. It can occur in subscription-based businesses due to deferred revenue.
• B. It always indicates bankruptcy.
• C. It never occurs.
• D. It only happens in manufacturing.

Answer: (C)

Negative working capital happens when current liabilities exceed current assets, meaning the business must fund its short-term needs from sources other than its ordinary current assets. In subscription-based models, customers pay upfront for future service, which boosts cash (a current asset) but creates a large amount in deferred revenue (a current liability) because the company hasn’t earned that revenue yet. If the upfront cash and other current liabilities grow faster than current assets, the result can be negative working capital. This isn’t a sign of bankruptcy; it’s a common pattern in asset-light, cash-collection-before-delivery businesses like SaaS, where cash inflows come before the ongoing operating needs are funded by that cash. Still, it’s important to monitor liquidity because shifts in churn, renewals, or supplier terms can affect the cash available to meet short-term obligations.