Cash flow from operations question
Is CFO calculated through taking changes into working capital or NET working capital into consideration? The difference between the two for the most part is that cash, gained or lost through selling inventory, would influence cash flow from operations.
It’s just about the change in working capital
You could look at the changes in each individual line item or, maybe for the purposes of an interview question, you may just be told that NWC increases by $XX
An increase in NWC reflects an investment in the business and will cause operating cash flow to decline
Thank you! That makes a lot of sense.
Quick question though, why is it not net working capital?
Because net working capital is a balance sheet calculation at a point in time. Change in net working capital is an actual cash movement, as to bridge two points in time (two balance sheets), there must be a movement in cash for there to exist such a delta (either positive or negative). Hope that explains.
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