Financial Glossary
Change in Net Working Capital
Change in net working capital is the difference between a company's net working capital (current assets minus current liabilities) at the end of a period and its net working capital at the start of that period. An increase generally means more cash is tied up in items like receivables and inventory, while a decrease means working capital is freeing up cash. It is a key adjustment in calculating free cash flow and in understanding how operations affect liquidity.
Problem & Application
For growing owner-operated businesses, a rising change in net working capital is a common, hidden reason a profitable company still feels cash-starved, because growth often inflates receivables and inventory faster than cash comes in. Operators who extend customer terms or stock up on supplies before peak season see this directly in their cash position. Tracking the change period over period shows whether the business is funding its own growth or quietly draining its cash reserves to do so.
In Short
Change in net working capital connects the balance sheet to real cash movement, explaining the gap between profit and cash. Watching it closely is how owners avoid being blindsided by a cash squeeze during growth.