A company's net working capital is the difference between its current assets and current liabilities. Current assets include items such as cash and accounts receivable, while current liabilities include items such as accounts payable. A company uses its working capital for its daily operations. You can calculate the change in net working capital between two accounting periods to determine its effect on the company's cash flow. An increase in net working capital reduces a company's cash flow because the cash cannot be used for other purposes while it is tied up in working capital. A decrease in net working capital increases a company's cash flow.
Step 1
Find the amount of a company's current assets and current liabilities on its most recent balance sheet and the previous accounting period's balance sheet.
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Step 2
Subtract the company's current liabilities from its current assets for the previous accounting period. For example, subtract $200,000 in current liabilities from $450,000 in current assets. This equals $250,000 in net working capital for the previous accounting period.
Step 3
Subtract the company's current liabilities from its current assets for the most recent accounting period. For example, subtract $250,000 in current liabilities from $350,000 in current assets. This equals $100,000 in net working capital for the most recent accounting period.
Step 4
Subtract the previous period's net working capital from the most recent period's net working capital to determine the change in net working capital. A positive number represents an increase in net working capital, while a negative number represents a decrease. For example, subtract $250,000 in net working capital in the previous period from $100,000 in net working capital in the most recent period. This equals negative $150,000, which represents a $150,000 decrease in net working capital between the two periods. By definition, this adds $150,000 to the company's cash flow from operations for the accounting period.
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