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Imagine you have a toy shop where you sell fun toys. Free Cash Flow is like the money you have left after buying the toys and supplies you need for your shop.
If you decide to buy more toys to have a bigger selection (like adding more Harry Potter figures or Barbies), you have to spend more money to get them.
Now, if you have a lot of toys in your shop (which means your net working capital goes up), you’re using more of your money to keep those toys instead of having it available to spend on other things, like candy or saving for a video game.
So, when net working capital increases (because you have more toys), your free cash flow goes down because you have less money left over after buying everything for your shop.
The net working capital increases means current liabilities are reducing and current assets increasing, so there is outflow of cash than inflow. So the cash inflow will be less
Working capital is a measure of a company’s liquidity. If working capital increases, it means that the company’s liquidity is reduced. This, in turn, lowers the company’s free cash flow
