It is important to note that the net working capital of a firm is the difference between its current assets and current liabilities. Notably, for properly managed companies, the control of net working capital is a daily activity that is conducted with great care. However, to some other companies handling net working capitals is a full financial distress. The impact of the net working capital is normally recorded in the cash flow statement of the company. The specific changes in the net working capital of the company are recorded within the operating cash flow section of the statement (Baños-Caballero, García-Teruel & Martínez-Solano, 2014). Increase in the net working capital implies that the current assets are higher than current liabilities. In this case, the company needs additional cash to be held up in operations. Therefore, increase in current assets is basically a net outflow (Brigham & Ehrhardt, 2013). However, the decrease in net working capital position implies that the company has got huge cash available for other projects. In this case, current liabilities are higher than the current assets. Increase in current liabilities is a net inflow.
Therefore, the decrease in net working capital is treated as an increase in cash because then it means the company has increased cash as opposed to assets. In most cases, borrowing in the short-term involves cash money for running the operations of the company. When current liabilities are higher than the current assets it means that the firm has not used up its cash. However, to get more current assets, the company must spend its cash hence engage in cash outflow activities. Current assets include things like the stock purchased. For the firm to increase its stock, it has to purchase more goods hence spend its liquid money. Cash at hand is, thus, reduced. But buying things on credit means the company does not spend any of its cash at hand.
Delegate your assignment to our experts and they will do the rest.
References
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research , 67 (3), 332-338.
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice . Cengage Learning.
