What changes in working capital impact cash flow? Shruti Gurudanti, Rose Law Group partner and director of corporate law, comments

By Ryan Fuhrman | Investopedia

Working capital and cash flow are two of the most fundamental concepts of financial analysis. Working capital is associated with the balance sheet on a company’s financial statement whereas cash flow is associated with the cash flow statement of a company’s financial statement.

As the different sections of a financial statement impact one another, changes in working capital affect the cash flow of a company. To find out how, it’s important to understand the components themselves.

Working Capital

Working capital represents the difference between a firm’s current assets and current liabilities. Working capital, also called net working capital, is the amount of money a company has available to pay its short-term expenses.1

Positive working capital is when a company has more current assets than current liabilities, meaning that the company can fully cover its short-term liabilities as they come due in the next 12 months. Positive working capital is a sign of financial strength; however, having an excessive amount of working capital for a long time might indicate that the company is not managing its assets effectively.


“Understanding working capital and working capital adjustments is critical for sellers so they can ensure they’re getting a fair price for their business.” -Shruti Gurudanti, Rose Law Group partner and director of corporate law, comments

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August 2023