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How do dividends impact working capital?

When a company declares a dividend, they must record a liability on the balance sheet until the dividend is paid out to shareholders. Since the dividend is typically paid within 12 months, the dividend would be classified as a current liability. As you can see in the visual below, when the company records the dividend, current liabilities increase, which cause net working capital to decrease. There is no impact to cash flow until the dividend is actually paid to the shareholders.

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