How do you model the NWC effect in a DCF?

Net working capital = operating current assets − operating current liabilities, typically: trade receivables + inventories − trade payables. The change ΔNWC = NWC(t) − NWC(t−1) gives the cash effect:

• NWC rises: a use of cash, subtract from FCF.
• NWC falls: a source of cash, add to FCF.

NWC is often set as a % of revenue, e.g. 18%. With 5% growth p.a. and a stable NWC %, NWC also rises by 5% — the resulting ΔNWC helps fund the growth.