Question

What are financial difficulties that a company will face if current assets are lower than current liabilities?

Answer 1

Answer:

Explanation:

A person can compare current liabilities and current assets using two ratios. These are the working capital = current assets - current liabilities, or the current ratio = current assets / current liabilities. Any current asset is considered close to cash or a receivable account given by sales. And any current liability is considered close to cash or payable account to seller. A positive working capital means the company can cover what it must pay, obligations or accounts owed. The larger the working capital, the less delinquent or doubtful it will honor payment to the sellers. A company might consider a moderate working capital, and use excess cash to invest in equipment or properties needed for the business operation. And these excess cash can also be considered in public stock issues, or a financial purchase on the market. The current ratio greater than 1 means the assets owned exceeds liabilities due in the current period of business operations, and lesser than 1 means liabilities due exceeds assets owned in the current period of business operations. More assets to cover liabilities in current operations means no accounts payable or finance obligations to a seller or company, and improves credit standing among finance attentive companies. An operating current ratio will contribute to mid-range business plans and longer-term solvency most businesses want and expect. It will keep the business in good standing with finance companies primarily banks and asset managers and take bankruptcy off the table.

Answer 2

A higher current assets than the current liabilities essentially signify negative working capital for any company or business organisation.It implies that the financial liabilities or debts are actually greater than the overall capital or cash inflow for the company or organisation.

Explanation:

If the current assets exceeds current liability,it mathematically implies negative working capital for any company or business enterprise.It essentially indicates that the overall financial debt or the liability of the company which it has to pay back or will be legally held accountable,is greater than the capital or cash inflow.In such situations,it will become alarmingly difficult for the company to pay off or clear the existing and accumulating financial debts or liabilities which could potentially lead to several legal lawsuits against the company and even an eventual shutdown or bankruptcy.A negative working capital signify either significant decrease in the current assets or a substantial increase in the current liabilities incurred by the company.It can also potentially hinder the ability if the company to opt for any further capital investment or financial loan due to lower credit confidence and ability of the company to successfully repay any future debt or liability.Therefore,in such financial predicament,it is imperative for any company to increase various sources of cash or capital inflow or lower its financial debt or liabilities to maintain a stable working capital at all times.A consistent negative working capital also means less capital available to the company to use in its regular business operations which can consequently affect its operational quality and performance in the short or long term.