What does an increase in working capital represent?

An increase in working capital represents a use of cash primarily because it indicates that a company is allocating more funds to its short-term assets, such as inventory and accounts receivable, compared to its short-term liabilities. This means that more cash is tied up in operational needs rather than being available for other uses. When a company increases its working capital, it may be investing in more inventory to support sales growth or extending more credit to customers, both of which require cash outflows.

In contrast, a decrease in working capital would free up cash, as the company would be lowering its investments in these areas, allowing for more liquidity. Therefore, an increase in working capital is absorbed into the current operations of the business rather than being available for immediate use or investment elsewhere.