# Working Capital

This article explains how **working capital** works in Model Reef.

You will learn:

* What working capital means in the context of the model.
* How working capital balances are generated from variables and timing.
* How the Change in net working capital line in the Cash Waterfall is constructed.

Working capital is the main bridge between accrual based profit and cashflow.

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### Working capital definition

In Model Reef, working capital focuses on timing related balance sheet items that arise from revenue and cost delays.

These usually include:

* **Accounts Receivable (AR)**
* **Accounts Payable (AP)**
* **Tax Payable**
* **Interest Payable**
* Any other short term timing items you choose to model.

The exact composition depends on your category design, but the concept is consistent.
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### How working capital is created

Working capital balances are a direct result of variable timing:

* Revenue with collection delays creates AR.
* COGS, Opex and Staff costs with payment delays create AP.
* Tax and interest accruals that are paid later create Tax Payable and Interest Payable.

You do not model working capital directly. You model revenue, costs and their timing, and working capital is derived from those decisions.
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### Change in net working capital

In the Cash Waterfall, the **Change in net working capital** line summarises the period to period movement in working capital balances.

Conceptually:

```
Change in net working capital
= Change in AR
− Change in AP
+ Change in other timing related balances
```

If net working capital increases, it uses cash and is shown as a negative adjustment. If it decreases, it releases cash and is shown as a positive adjustment.

This adjustment is applied after EBITDA to move from accrual based earnings to a closer approximation of operating cashflow.
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### Working capital in the Cashflow Statement

In the Cashflow Statement, working capital effects are implicit rather than shown as a separate line.

* Receipts from customers and payments to suppliers and staff already include the impact of timing in a direct method presentation.
* The Balance Sheet movements in AR and AP reconcile the difference between accrual and cash.

The Cash Waterfall makes these effects more visible for investors by exposing a dedicated Change in net working capital line.
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### Working capital in scenarios and planning

You can use working capital analysis to:

* Test the impact of slower or faster customer collections.
* Explore supplier term changes and their effect on cash.
* Assess the cash cost of growth when AR grows faster than AP.
* Compare working capital intensity across branches or businesses.

Scenario models with different working capital assumptions will often produce very different cash and valuation outcomes, even if revenue and margin paths are similar.
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***

## Related articles

* [SaaS & Subscription Businesses](/use-cases/saas-and-subscription-businesses.md)
* [Build a Working Capital Model](/how-tos/operations-and-unit-economics/build-a-working-capital-model.md)
* [FCFE Calculation](/help/financial-outputs-and-valuation/fcfe-calculation.md)
* [Driver Editor Screen](/syntax/understanding-the-interface/driver-editor-screen.md)


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