What is meant by changes in working capital within the context of a companys “Cash Flow from Operations”?
A. A company’s cash flow from operations is impacted by increases and decreases in current assets and current liabilities. For example, if during an accounting period A/R’s are reduced, it means that cash flow is increased as customers pay balances due. If at the same time A/P’s are reduced, the company’s cash flow is decreased as cash is used to pay the company’s bills. Recognizing the impact of changes in working capital on valuation is as critical as sound management of working capital to the financial survival of any company.
