A:

Working capital represents the difference between a firm’s current assets and current liabilities. For well-run firms, managing working capital is simply a daily occurrence that can be handled easily. For other firms, the way the process is handled can indicate financial distress.

The impact of working capital changes are reflected in a firm’s cash flow statement. Specifically, the operating cash flow (OCF) section of the cash flow statement details changes in its shorter-term working capital needs. An increase in working capital figure (current assets are greater than current liabilities) requires additional cash to be tied up in operations because an increase in current assets is a net outflow. In contrast, a decrease in working capital position means the firm has more cash available that can be used for other projects since an increase in current liabilities is a net inflow. Analyzing changes in working capital can be important for any business, but is especially important for firms with seasonal or erratic cash flow needs.

Retailing giant Wal-Mart Stores Inc (WMT), like most retailers, spends a considerable amount of working capital prior to the holiday season.

Looking at Wal-Mart’s 2016 cash flow statement for the fiscal third quarter ended October 31, 2016, we can see that it spent $6.57 billion (reflected as a cash outflow) on inventory. This contrasts sharply with the other three quarters. In its first and second quarters, spending on inventory was minimal and came in at $264 million and $791 million (both cash inflows), respectively. In the fourth quarter, inventory decreased by a wide margin and the change in working capital went up from -$10.73 billion to -$9.24 billion.

The Bottom Line

Most of the time, a company’s working capital is simply a core part of its daily operations. But it can indicate financial problems, especially when working capital runs in the negative for an extended period of time.

RELATED FAQS
  1. What are some examples of cash flow from operating activities?

    Learn about the cash flow statement and cash flows from operating activities, and observe some examples of cash flows from ... Read Answer >>
  2. Can Working Capital be Negative?

    Negative working capital can arise under certain circumstances. Read Answer >>
  3. How can working capital affect a company's finances?

    Understand how working capital may affect a company's financial strength and investment effectiveness, as it changes from ... Read Answer >>
  4. What does low working capital say about a company's financial prospects?

    Find out what it means when a company has low working capital, including how this metric is interpreted based on business ... Read Answer >>
  5. What does a low working capital ratio show about a company's working capital management?

    Find out the significance of working capital management for a company and look at the working capital ratio analysts use ... Read Answer >>
  6. What sorts of factors decrease cash flow from operating activities?

    Learn about the factors that reduce cash flow from operations. What causes net income to decline, and what other uses and ... Read Answer >>
Related Articles
  1. Investing

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  2. Investing

    Cash Flow Statement: Reviewing The Cash Flow From Operations

    A company's ability to consistently generate positive cash flows from its daily business operations is highly valued by investors. Operating cash flow can uncover a company's true profitability ...
  3. Investing

    Analyze Cash Flow The Easy Way

    Cash flow statements reveal how a company spends its money and where that money comes from.
  4. Investing

    Cash Flow Statement: Analyzing Cash Flow From Financing Activities

    The financing activity in the cash flow statement measures the flow of cash between a firm and its owners and creditors.
  5. Investing

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  6. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  7. Investing

    Cash Flow On Steroids: Why Companies Cheat

    Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it.
  8. Investing

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  9. Investing

    Evaluating Your Personal Financial Statement

    Determine your net worth by making your own cash flow statement and balance sheet.
RELATED TERMS
  1. Cash Flow From Investing Activities

    An item on the cash flow statement that reports the aggregate ...
  2. Operating Cash Flow - OCF

    Operating Cash Flow (or OCF) is a measure of the amount of cash ...
  3. Working Capital

    Working capital is a measure of both a company's efficiency and ...
  4. Cash Flow Statement

    One of the quarterly financial reports any publicly traded company ...
  5. Gross Working Capital

    The sum of all of a company's current assets (assets that are ...
  6. Cash Flow From Operating Activities (CFO)

    Cash Flow From Operating Activities (CFO) is an accounting item ...
Hot Definitions
  1. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
  2. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  3. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  6. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
Trading Center