The investment banking interview question we’re going to go over today is a tricky one: “Is negative working capital bad?” Here’s what you can say.
“Negative working capital is not necessarily bad. It depends.
For example, a lot of businesses have large deferred revenue balances because they receive cash upfront before they provide the product or service. This large deferred revenue balance causes working capital to go negative. For these businesses, negative working capital is actually a good thing.
For other businesses, they might have negative working capital, but as long as they sufficient cash in their bank account and access to revolver, they should be OK.
Where negative working capital becomes alarming is if the company doesn’t have sufficient cash on hand and it doesn’t have access to revolver. Then it could face a liquidity crisis.”
That’s how you can answer this question: “Is negative working capital bad”. The most common mistake we see candidates make with this question is that they talk for several minutes and interviewer still has no idea what their stance is. So make your stance clear right from the beginning.