What happens to Free Cash Flow if you increase accounts payable?

• A. It decreases
• B. It remains the same
• C. It increases
• D. It becomes unpredictable

Answer: (C)

When accounts payable increases, it indicates that a company is deferring payments to its suppliers and creditors. This means the company retains cash that would otherwise be used to pay for its short-term liabilities.

Free Cash Flow (FCF) is calculated as operating cash flow minus capital expenditures. By increasing accounts payable, a company can effectively increase its operating cash flow because it is holding onto cash longer and delaying outflows. Since more cash is retained in the business due to the delay in payments, the free cash flow will consequently increase.

This dynamic between accounts payable and free cash flow illustrates the importance of working capital management. By managing accounts payable efficiently, a company can enhance its liquidity and operational flexibility.