What does a change in net working capital reveal about a company's cash flow?

A change in net working capital is a key indicator of a company's cash flow situation because it directly reflects how much cash is tied up in day-to-day operations versus how much cash is readily available for other uses. Net working capital is calculated as current assets minus current liabilities. When there is an increase in net working capital, it often means that more cash is being used for inventory or receivables, indicating that cash is not available for immediate use. Conversely, a decrease in net working capital can suggest that cash is flowing more freely, which typically has a positive implication for cash flow.

The relevance of this concept lies in how it highlights a company's operational efficiency and effectiveness in managing its short-term assets and liabilities. By monitoring changes in net working capital, stakeholders can gain insight into whether a company is effectively managing its working capital, which is essential for maintaining liquidity.