Change in Working Capital represents the increase or decrease in net working capital from one accounting period to the next. Net working capital is calculated as current assets (e.g., receivables, inventory) minus current liabilities (e.g., payables, accrued expenses). A positive change indicates a use of cash in operations, while a negative change indicates a source of cash.
Why is Change in Working Capital Important?
Change in Working Capital is important because it:
Reflects Operational Cash Flow Impact: Shows how changes in receivables, inventory, and payables affect cash available for operations.
Highlights Efficiency: Large increases in working capital can signal slow collections or excess inventory, whereas decreases can indicate improved receivables management or stretched supplier payments.
Supports Forecasting: Helps investors and management anticipate cash needs and plan financing or investment activities.
How is Change in Working Capital Calculated?
Change in Working Capital is calculated by comparing net working capital at the beginning and end of a period:
Change in Working Capital = (Ending Current Assets − Ending Current Liabilities) − (Beginning Current Assets − Beginning Current Liabilities)
Where:
Current Assets include cash and equivalents, receivables, inventory, and other current assets.
Current Liabilities include payables, accrued expenses, deferred revenue (current), and other current liabilities.
Additional Considerations
Component Analysis: Examining individual changes in receivables, inventory, and payables provides deeper insight into working capital drivers.
Seasonality Effects: Seasonal businesses may experience predictable swings in working capital, which should be considered in year‑over‑year comparisons.
Cash Flow Statement Link: In the cash flow statement, changes in working capital are reflected in operating cash flows, reconciling net income to cash generated or used by operations.