working capital needed for FCFF

In order to calculate working capital needed for FCFF, why would we take the change in all current assets (excluding cash) and current liabilities, do not the two include current non operational accounts?

The primary goal is to determine the change in cash. For current assets, accounts such as accounts receivable and investments are examined for any YoY change. An increase infers that less cash is available due to being owed more money or using cash to increase investments.

On the other hand, an increase in current liabilities infers that more cash is available as spending is funded by more borrowing rather than cash. Negative working capital will typically have a positive effect on FCFF.

Plus, not just cash. All monetary assets/liabilities are excluded.

You do not get my point, working capital should include only accounts related to the company’s operations like A/R, A/P. Inv,…etc but my question is why would I include all C.A(excluding cash) & C/L as they have other items like prepaids, other current liabilities,…etc that would are not directly related to operation. Accordingly, FCFF is misleading

If I’m not mistaken this is because we are valuing the company’s operational business. Assets related to non-operational parts are valued separately and then added to the Enterprise Value after the FCFF valuation to get the Enterprise Value including non-operational assets.

it is not clear for me :frowning_face:

Prepaid expense is directly related to the operating business of a company. Other current liabilities, for example unearned revenue, is also directly related to the business.