Financial Modeling Impact of Working Capital
In financial modeling working capital changes can have a big impact on cash from operations, free cash flow, and the resulting valuation of a business. If a business experiences an increase in accounts receivable, it means it has not collected payment on a portion of its revenue, which causes cash flow to decrease. Conversely, if a company has an increase in accounts payable, it means the company has expenses it has not paid for which causes cash flow to increase. The net effect of changes in current assets and current liabilities is what makes up the working capital impact in financial modeling.