What does a decrease in working capital indicate?

A decrease in working capital indicates a source of cash because it typically means that a company has reduced its current liabilities or increased its current assets more effectively than its liabilities. Working capital is calculated as current assets minus current liabilities, so when it decreases, it can reflect that the company has become more efficient in managing its inventory or receivables, or it has paid off some of its short-term obligations. This efficiency results in cash being released back into the business, thereby providing the company with available cash resources to invest or utilize as needed.

In contrast, an increase in liabilities would typically suggest a reduction in working capital rather than a decrease. Similarly, while a use of cash option might imply that cash is being consumed rather than freed up, a decrease in working capital is precisely the opposite—it signifies that cash has become available. No impact on cash is also not accurate since working capital directly affects cash flows.