Negative Working Capital and Business Sustainability - (A Case Study of Nestle India Limited)

Working capital decision affects both liquidity and profitability. Excess of Investment in working capital may result in low profitability and lower investment may result in poor liquidity. Management need to trade-off between liquidity and profitability to maximize shareholders wealth. But there are instances where companies running with negative working capital earning good rates of return. Negative working capital is a reverse situation as compared to normal working capital. Negative Working capital doesn't always mean bad financial condition; it indicates that most of the day to day activities are funded by customers rather than company’s own working capital. Earlier negative working capital was considered as a risk of insolvency of the organizations but at present negative working capital is a sign of managerial efficiency in a business. Keeping these views in mind, this research article explains the conceptual background of the negative working capital and how it affects profitability of the corporate. Leading FMCG Company, Nestle India Limited, is taken as a case, to analyze the negative working capital and its impact on the profitability and earning capacity of the firms. Finally, it is found that companies in which negative working capital exist, profitability is more and shareholders are getting more dividend and capital appreciation, which maximizes the shareholders’ value in the long run