This change in working capital is called an alteration in net working capital between the accounting cycles. In accounting terminology, it is equal to the difference between assets and liabilities. Working capital, also called net working capital, is the amount of money a business has to pay for its short-term expenses.    

The main goal of a business manager is to minimise the upward alteration to working capital for a positive impact. Working capital needs to be monitored, and this responsibility lies with the chief financial officer. If there is any change, his job is to work on it and keep it afloat.    

How can changes impact working capital?    

Change in the working capital of any company is the change in net working capital from one accounting period to another. Changes occur when there is an increase or decrease in the value of current assets and current liabilities.    

• An increased net working capital is considered positive because the change in current liabilities increases more than current assets, which means increased liquidity.    
• Change in working capital is considered harmful when the change in current operating assets is greater than current operational assets. This means money is spent and liquidity has decreased.    

What causes a change in the working capital? Several factors cause a fluctuation in the working capital. Here are the top 5 things that cause a difference.    

1. Credit policy alternations  

The stricter the credit policy, the lower the number of accounts receivable, which frees cash. The goal is to adjust how quickly the money comes in. A disadvantage to having a strict credit policy is that buyers may be open to firms with a strict credit policy.    

2. Accounts payable payment duration    

The time taken from the supplier for the return of accounts payable also causes a change in the working capital. That is because the longer the accounts payable period, the more time you pay your bills. This also has a downside because if the supplier increases the accounts payable payment duration, they might also increase the price.    

3. Purchasing practices    

To lower net working capital, a firm’s purchasing practices play an essential role. If the purchasing department buys larger quantities at once, they can get a better price than buying smaller amounts quickly. But buying larger quantities of supplies results in a higher outlay of cash.    

4. Inventory planning    

Inventory planning is an essential factor which can result in a change in working capital. An organisation spending extra on stock to increase its fulfilment price will drain more money. Lowering inventory has the opposite effect.    

5. Hedging Techniques  

A company’s hedging strategy that tries to limit risks in financial assets can create offsetting cash. This will generate transactional costs that qualify us as a use of cash. These costs must be accommodated appropriately.  

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