Which scenario is not a contributor to negative working capital?

• A. A firm that collects cash upfront from customers
• B. A subscription-based business with high deferred revenue
• C. A firm with slow collections and high debt
• D. A retailer with prepaid customer payments and strong supplier terms

Answer: (A)

The key idea is how up-front cash receipts affect current assets and current liabilities. When a firm collects cash in advance from customers for goods or services not yet delivered, it records more cash (a current asset) and also records a corresponding liability (unearned revenue) for the obligation to provide those goods or services. These two increases offset each other in the working capital calculation (current assets minus current liabilities), so this action does not worsen, and often does not change, the level of negative working capital.

In contrast, the other scenarios push current liabilities higher or reduce current assets relative to liabilities: high deferred revenue increases current liabilities; slow collections reduce cash by tying up receivables; large debt increases current liabilities; and prepaid customer payments with extended supplier terms can raise liabilities or delay cash outflows. Each of these tends to contribute to a negative working capital situation, whereas collecting cash upfront does not.