What Changes in Net Working Capital Affect Cash Flow?
Also known as net working capital, it is the amount that a company has on hand to pay the short-term expenses it needs to meet.
How Does Working Capital Impact Cash?
Some changes arising from WC are reflected in the cash flow statement of a company. Below are examples of how the cash balance and working capital of a company can be impacted in such a way.
If a transaction makes current liabilities and assets go up by the same dollar amount, then there would not be any change in working capital.
- If a company has bought a fixed asset like a building, then its cash flow would go down. While the working capital of that company would also decrease because the cash would be reduced, current liabilities would stay unchanged, as that would be its long-term debt.
- In contrast, selling a company’s fixed assets would increase both cash flow and WC.
- If a company bought stock with cash, then there would not be any change in working capital because the cash and inventory are its current assets. The cash flow would be decreased by the stock purchases, though.