What Is the Difference Between Working Capital and Cash Flow?
How’s your company’s financing performing? If you’re concerned with your current financial situation, or you’re simply looking for an accurate way to measure your financial standing, it’s essential that you understand the difference between working capital and cash flow. Understanding these two ways of looking at your available financing can help you accurately identify your current situation and help you see whether you need financing.
Both financial measurements offer very different pictures. Essentially, your cash flow looks at the amount of incoming and outgoing cash, while your capital amount is the resources that are immediately available to make a purchase or pay off debt.
Cash flow helps you get a long-term picture of whether your business is financially sustainable. There are several ways to measure your cash flow, whether you want a short snapshot or a bigger picture of your financial situation. Either way, your cash flow can be either positive or negative.
Ideally, your cash flow is positive. This means that you are, on balance, bringing in more income than you’re spending. This may be only for the month, year or a longer operating time. If you have a negative cash flow, it means that your business is spending more than it’s bringing in. A few months or even years of negative cash flow won’t ruin your business, but it’s an issue that you should be aware of. You should have a long-term strategy of reversing your cash flow to be positive.
Working capital, however, is a more pragmatic, short-term calculation. There are many ways to calculate this as well, but your current capital amount shows the liquid capital you could use to immediately purchase inventory, make payroll, or pay off financing.
Your capital amount is important for financing. Your lender needs to know how much cash you have on hand. If your business is operating with very little capital in the bank, you may not be able to make timely payments. Prove your business isn’t strapped for cash by keeping a healthy amount of capital on hand at all times. This will help any financing application in the future.
Compare your working capital and cash flow to determine the financial health of your company. Some companies may have a large amount of capital on hand now, but are steadily losing money due to negative cash flow. Others have excellent cash flow, but can’t hold on to it long enough to keep their operations flexible. Balance the two and work to build up your capital and cash flow today.