OWC or operating working capital requires or provides funding We can also see that changes in operating working capital have a cash flow impact too This what we want to look at in more detail here, let's use an example Here we have a business which has positive operating working capital So they have a funding requirement (they've got lot's of inventory or accounts receivable maybe) We can see in year 1 they had OWC of 1,000 and in year 2 that went down to 800 and that's a key movement If the amount of cash tied up was a 1,000 and then the next year the amount of cash tied up was 800 That means 200 of cash has been released and is available to the rest of the business So the cash flow impact here is 200 positive, fantastic! Now let's go from year 2 to year 3 Operating working capital was 800 and it goes up to 1100 i.e. cash tied up went from 800 to 1100 This means more cash has been tied up. Cash has been sucked out of the company's bank and has now been tied up in inventory or accounts receivable maybe So the cash flow impact here is negative, it has negatively affected the company's cash flows We thus can see that the 200 positive was a cash inflow and the cash outflow of 300 Now let's go into a second example, a company starts with negative operating working capital So in year 1, the figure was negative 10 Great! They've got a source of funding here, 10 is being provided to the rest of the business The year after, the amount of funding being provided to the rest of the business by OWC is 15 This is fantastic! If you think of this as accounts payable, so my accounts payable was 10 (I had 10 of my suppliers' cash) I've now got 15 of my suppliers' cash More free cash, this is fantastic. So the cash flow impact here is 5 positive And that is thus in cash inflow But going from year 2 to year 3, we see the opposite happening We had 15 free funding, great! And that now goes down to only 2 of free funding That means that we've had to invest some cash (or at least more cash) into our operating working capital Or put it another way, less free funding is available We had 15 of free funding, it's now only 2 of free funding Nightmare! We've had a cash outflow of 13 here So changes in operating working capital lead to cash flows and those cash flows impact our funding