Definition
Change in working capital is the period-over-period movement in operating working capital (typically AR, inventory, AP). It explains cash shifts that do not show in profit.
Formula
Change in working capital = current period NWC - prior period NWC
Example
If NWC rises from $200k to $320k, change in working capital is +$120k, which uses cash.
How to use it
- Rising receivables or inventory usually consumes cash even if revenue is growing.
- Improving payables terms can release cash without changing revenue.
Common mistakes
- Treating higher NWC as always good; it can signal collections issues.
- Mixing operating items with cash or short-term debt in the calculation.
Measured as
Change in working capital = current period NWC - prior period NWC
Misused when
- Treating higher NWC as always good; it can signal collections issues.
- Mixing operating items with cash or short-term debt in the calculation.
Operator takeaway
- Rising receivables or inventory usually consumes cash even if revenue is growing.
- Improving payables terms can release cash without changing revenue.
- Tie Change in Working Capital to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Cash conversion cycle: turn working capital into runway if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Change in Working Capital belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Cash conversion cycle: turn working capital into runway: A practical guide to the cash conversion cycle (CCC): how AR/AP timing changes cash, how to reduce days outstanding, and why runway depends on working capital.
- Runway and burn: gross vs net burn, working capital, and cash levers: A practical guide to runway: compute net burn, understand why cash differs from profit, and how working capital and collections change runway.