Zero Working Capital
As an entrepreneur, individuals must make it a point to become
familiar with the relatively new concept – zero working capital
– for more clarity over the situation.
What Is Zero Working Capital?
Usually, when an enterprise has the same amount of current
assets and current liabilities, it has zero working capital.
Such a situation arises when a company’s current liabilities
fully fund its current assets, as highlighted in the table
Total Current Assets = Total Current Liabilities
Total Current Assets – Total Current Liabilities = 0
Example Of Zero Working Capital
Take a look at this example below to understand the concept of
zero working capital.
Suppose a company, ABC Ltd., has the following balance sheet for
the year ending on 31 March 2021.
Balance Sheet as on 31/03/2021
Long Term Assets
Land and Building
Plant and Machinery
Furniture and Fixtures
Long Term Liabilities
Using the data given above, one can calculate working capital in
the following manner:
Total Current Assets = Cash + Account Receivables + Inventory
+ Prepaid Rent
= Rs. (50,000 + 1,80,000 + 1,75,000 + 1,55,000)
= Rs. 5,60,000
Total Current Liabilities = Sundry Creditors + Outstanding
Expenses + Bills Payable
= Rs. (1,95,000 + 2,65,000 + 1,00,000)
= Rs. 5,60,000
Therefore, as ABC Ltd. does not have an excess of current assets
over its current liabilities, it has zero working capital.
Benefits Of Zero Working Capital:
If an enterprise can maintain zero working capital without
incurring excessive liquidity risk, it can benefit the firm’s
operations in the following ways:
Reduces The Level Of Investments In Working Capital
Zero working capital is used as a strategy to reduce a
company’s investment in working capital. As a result, it leads
to an increase in its investment in long term assets. By
following this strategy, a company can avoid excess
investments in current assets and pay off its current
liabilities using only its current assets.
Facilitates The Just-In-Time Method
A zero working capital approach can only exist if a company
adopts the “Just-in-time” methodology. It is an inventory
strategy wherein materials are produced and supplied as and
when a demand for them arises. Accordingly, the company can
follow demand-based production as well as the distribution
In addition, the company gains the flexibility to modify its
terms for account receivables and payables to keep up with the
just-in-time practice. As a result, the company extends
payable time granted by suppliers and cutback credit terms to
Saves Money Spent On Maintaining Inventory
A company running on zero working capital can outsource the
entire manufacturing process. As a result, it can eliminate
the maintenance of inventory, manufacturing facilities and
overheads. Moreover, this enterprise will make payments to its
outsourced manufacturer when its customers receive the goods
and release payments.
Zero working capital centralises operations to eliminate
account payables, thereby lowering overheads. For instance, a
firm can lease machinery rather than purchasing it.
Thereafter, it can fund the lease payment out of its account
Additionally, the strategy allows a company to strike
partnerships with other firms for functional areas, using
their resources to reduce expenditure on relevant heads.
Often companies are unable to maximise the perks induced by
zero working capital. This is because achieving the said
outcome in practice is not always possible.
Implementation Of Zero Working Capital
Although the concept may seem enticing, it is often challenging
to achieve the same due to these reasons:
Suppliers extend credit terms as per the industry standard and
will only accept longer payment terms against higher product
Generally, customers do not pay in advance, an exception being
consumer goods. In most cases, they refuse to make early
payments. In some cases, they even demand delayed payment
A demand-based, just-in-time production strategy can be a
complex concept for customers to comprehend in industries with
high competition based on immediate fulfilment of orders.
In the services industry, payroll essentially replaces
inventory in the working capital concept. So, although there
is no inventory, employees must be paid at regular intervals
prior to customers making payments.
Certain assets cannot be easily and promptly converted into
cash when liabilities are due. Therefore, maintaining extra
current assets is essential for a company to pay its bills on
So, optimum working capital plays a key role as it allows a
company to undertake day to day operations and critical
investment decisions. A shortage of working capital can,
therefore, be detrimental to a business. Also, when faced with
such a cash crunch, businesses can leverage their tied up
accounts receivable from KredX.
KredX is a leading cash flow solution provider that helps to
address operating capital requirements. It helps businesses gain
quick access to funds in 24-72 hours* by way of an easy digital
process. Moreover, one need not pledge any collateral to avail
funds, thus unlocking liquidity to maintain a healthy cash flow
A company operating with a very high working
capital may indicate that it does not invest its
excess cash optimally. It can also denote that
this firm is neglecting its growth opportunities
and is solely focused on maximising liquidity.
In addition, an extremely high working capital may
imply that a business is overly invested in
inventory or that its collection of debts is
ineffective, thus highlighting operational
inefficiency and/or waning sales.
Companies employ this strategy to avoid excessive
investments in current assets and pay off current
liabilities by using their existing current assets
A company can reduce its working capital without
jeopardising its ability to meet short-term
obligations by adopting an on-demand production as
well as distribution system or a just-in-time