Which scenario can contribute to negative working capital?

• A. Businesses with subscriptions or longer-term contracts and high deferred revenue
• B. All businesses with negative cash flow
• C. Companies with always high accounts payable
• D. Businesses with large cash balances and no payables

Answer: (A)

Timing of cash inflows and revenue recognition affects whether working capital ends up negative. In subscription or longer-term contract models, customers pay upfront, creating a sizable current asset (cash) while the obligation to deliver services sits as deferred revenue, a current liability. As you provide the service over time, you recognize revenue and reduce the deferred revenue, but the upfront cash remains. If the deferred revenue balance is large relative to other short‑term assets, current liabilities can exceed current assets, producing negative working capital. This pattern is common in businesses like SaaS where cash is collected in advance but revenue is earned over the contract term.

Other options don’t align with the mechanism as directly: negative cash flow alone doesn’t automatically imply negative working capital, high accounts payable by itself isn’t enough to drive negative working capital, and having large cash with no payables would actually support positive working capital.