Why are changes in net working capital considered to be cash inflows or outflows?

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belarafon eNotes educator| Certified Educator

Working capital is the portion of money allowed for a project on budget, covering all parts of the project without over or under budgeting. The net working capital is that same money after all liabilities are subtracted, showing the actual cash available (gross working capital would be all the project assets regardless of liabilities).

If the main goal of the working capital is to have money available for projects, we can see alterations in the net working capital as cash inflow or cash outflow; since all liabilities are subtracted from the net, increasing the net capital increases available money, while decreasing it decreases available money.

If profits are high and net working capital increases, this can be seen as a cash inflow to project budgeting; if the net capital decreases, this can be seen as a cash outflow, meaning that the working budget is smaller.

While cash inflow is usually a direct result of investment returns and company activity, cash outflows are the result of spending and operations, and so a decrease in the budget is not necessarily the result of a net working capital change. However, the change is usually recorded as such to keep the books simple and correct.