Three statements Updated November 2026

Change in net working capital

Net working capital (for cash flow purposes) = non-cash current assets - non-debt current liabilities, mainly receivables + inventory - payables. The change in NWC = NWC this year - NWC last year. An increase ties up cash and is subtracted in free cash flow; a decrease is added.

Syntax

Change in NWC = NWC_t - NWC_(t-1);  cash effect = -(change in NWC)

Examples

AR 100, inventory 80, AP 60
=100 + 80 - 60

Result: NWC = 120

NWC rises from 120 to 130
=130 - 120

Result: +10, a cash outflow of 10

NWC falls from 200 to 180
=180 - 200

Result: -20, a cash inflow of 20

Common mistakes

Including cash and short-term debt in NWC: both are financing items, so operating NWC excludes them.
Getting the sign backward: in the cash flow statement an increase in receivables appears as a negative number.
Forecasting NWC as a flat number while revenue grows, which creates a fake cash inflow; drive it from days or percent of revenue.

Practice Change in net working capital

These drills check your answer on live data, free, no account needed.

Working capital from daysForecast the working capital balances from the day counts in B2:B4: receivables from revenue, inventory and payables from cost of goods sold, each as days out of 365. Then net working capital is receivables plus inventory less payables.
Cash flow from operationsNet working capital balances are given for each year end, including 2025. Fill the change in working capital (row 8) and cash flow from operations (row 9): net income plus depreciation less the increase in working capital.
Unlevered free cash flowFill NOPAT (row 6: EBIT after tax at the rate in B2) and unlevered free cash flow (row 10: NOPAT plus depreciation, less capital spending, less the increase in working capital).

Questions

Why does an increase in working capital reduce cash flow?

Because the company has paid for inventory or delivered goods on credit without yet receiving the cash. The profit is booked but the cash is still outstanding.

Is negative working capital bad?

Not necessarily. Subscription and retail businesses often collect from customers before paying suppliers, so negative NWC is a source of cash as they grow.

Working capital daysDSO = receivables / revenue x 365, DIO = inventory / COGS x 365, DPO = payables / COGS x 365. Compute the days, forecast balances and get the cash cycle.
Unlevered free cash flowUnlevered free cash flow = EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. Examples from EBIT and from EBITDA, plus the sign rules.
Cash flow from operationsCFO = net income + D&A + other non-cash charges - increase in working capital. How the indirect method works line by line, a worked example and sign errors.
Free cash flowFree cash flow is cash from operations minus capital expenditures. The simple formula, the free cash flow to equity version and examples with exact numbers.