Net working capital & cash flow

Quick question about NWC effect on cash flow

if inventory or accounts receivable increases, we have to decrease cash flow to account for the cash that was paid to buy the inventory or the cash you aren't receiving from accounts receivable 

So I'm a little confused why we have to account for this change. Shouldn't it be shown on the balance sheet? Is it not reflected because a change on the balance sheet doesn't affect our income statement or cash flow statement? 


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Comments (7)

Mar 29, 2021 - 10:12am

If I'm understanding your question correctly, it is a simple asset swap-cash for inventory is cash out but it does not hit the P&L until the inventory is sold (or liquidated).

If you have AR, cash flow is negative. Let's say you are in $10 on the inventory which is awaiting payment from a customer and you sell it for $14 you have a Net change to cash flow of $4


  • Prospect in IB-M&A
Mar 29, 2021 - 10:57am

What I'm asking is.

Say you buy inventory  - on the balance sheet your cash will decrease and your inventory will increase. 

So, why do you need to adjust for this in the cash flow? Aren't you already accounting for the decrease in cash on your balance sheet? Why doesn't it flow from the balance sheet to the IS or CF? 

Mar 29, 2021 - 11:13am

Well, like you said the 2 things changing are cash and inventory. However, cash on the BS comes from the final line item in the CFS. So you need to first go through the CFS to get to cash and then that cash flows to BS and then you can account for inventory increase. Sure, you could skip a step and go straight to BS as a shortcut in your head, but always remember that the line item of Cash on the BS flows from the CFS so in an interview, you not mentioning CFS at all is incorrect.

  • Prospect in IB-M&A
Mar 29, 2021 - 11:15am

Great, that clarifies it a lot! 

Basically, I just didn't properly understand the order and sequence of how it'd flow.

Thanks so much

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Mar 29, 2021 - 6:54pm

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