Working Capital is an important element on both the Balance Sheet and the Cash Flow Statement. It’s a measure of liquidity and its change from one period to another reconciles the time gap between when revenue / expenses are recorded on the Income Statement and when cash is actually received / paid on the Cash Flow Statement. We’ll learn about the concept of working capital first, then we’re going to dive deeper into the calculations, especially the opposite formulas when calculating changes in current assets versus current liabilities.
Key Takeaways:
- How working capital reconciles time gap between recognition and cash flow
- Why changes in working capital impact cash flow
- Analyzing a business’s efficiency and liquidity