what is the complete formula for net working capital? why account payable is considered a cash inflow? Thanks.
Increase in Liability is source of cash and hence increasing Account Payables would be considered inflow of cash. Further, because it is a non-cash current liability, it is included in determining net working capital. Similarly Increase in Assets is ‘use’ of cash and hence increasing Account Receivables would be considered outflow of cash.
put differently: if accounts payable increase it means you havent actually paid the cash for part of the expense you recognized on the income statement. so you have more cash than you “should have”. youre practically borrowing cash from your suppliers in a way which you have available for other purposes until your payments are due. (accounts receivable work the other way, you do not collect all the revenue you recognized in cash and hence lend customers cash --> so you have less cash than you could have for other purposes like investments etc)