Which scenario can contribute to a company having negative working capital?

Having negative working capital occurs when a company's current liabilities exceed its current assets. This situation can be influenced by various factors, and in this case, deferred revenue from subscriptions is significant.

When a company collects payment for services or products that will be delivered in the future—such as subscription fees—this amount is recorded as deferred revenue, which is categorized as a liability on the balance sheet. If a company relies heavily on this form of revenue and has limited cash or other current assets, it may find itself in a situation where its current liabilities surpass its current assets, leading to negative working capital. This can be particularly common in subscription-based business models, where upfront payments create a large liability until the service is fulfilled.

In contrast, high cash reserves generally indicate a strong liquidity position, excess inventory may tie up resources but does not directly imply negative working capital unless combined with significant liabilities, and low demand for products could lead to excess inventory but doesn't directly calculate into working capital unless it impacts revenue collection or cash flow.