I invest in receivables (factoring) and I'm trying to determine what obligors are a good and not deteriorating credit risk. Part of this involves assessing obligors that are extending their days payable outstanding and the articles I've read indicate that this increases cash flow thereby allowing the firm to do more, buy more assets, make acquisitions etc.
So, I think working capital is defined as current assets minus current liabilities. In the example on this page: http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/working-capital-869
WC = $95k
The article says that positive WC means a company can pay off their short term liabilities. That seems to me to mean the more positive WC the more a firm increases their cash flow
If the company extends the time frame to pay their accounts payable by a month, then I think their current liabilities will increase. This is because payables that would have been paid last month and removed from current liabilities will still be there. So working capital will go down because Current Assets - Current Liabilities will be a smaller number. I think that means deteriorated cash flow.
Assuming I have that part correct, here is my question. In this article http://www.scdigest.com/ontarget/13-05-02-1.php?cid=7006
In the 4th paragraph it says that by extending their payment terms, P&G is "reduc[ing] working capital, and therefore improv[ing] cash flow."
The word 'Reduce' seems to me should say 'Increase'. I.e. by increasing working capital they are increasing cash flow. Am I missing something? I'm not an accountant or financial analyst so I'm interested in the view of someone that is familiar with the topic.
Thanks in advance for your help.