The Different Stories Told Between Working Capital and Cash Flow

If you’re a small business owner, then you no doubt understand that maintaining a healthy bottom line is key when it comes to your ongoing success. What you may not be as aware of are the many ways your working capital and cash flow actually affect one another. The following breakdown may help you make better sense of things going forward.

What’s the Difference Between the Two?

Many people who are new to business ownership make the mistake of assuming their capital and their cash flow are more or less the same thing. However, while they’re related, they’re actually very different. 

  • Your business’s cash flow is exactly what it sounds like. The term refers to both your income and your expenditure in actual dollar amounts – the flow of cash into and out of your accounts over the course of a given period.
  • Working capital, on the other hand, refers only to the difference between your liabilities and assets. Your assets are what can be converted into actual cash in a pinch, while you’re liabilities refer to expenses that are either currently due or will be within the next twelve months.

Each of these elements lets you see your bottom line from a different angle. Understanding the relationship between the two is what helps you keep that bottom line healthy.

Making the Relationship Work for You

Analyzing your cash flow is a good way to assess your company’s livelihood and profits on a more forward-thinking basis. Capital, on the other hand, provides a better way to assess the immediate financial health of your business, as it takes current expenses into consideration. When you take both into consideration at once, you get a clearer overall picture of your bottom line.

For instance, let’s say your working capital is on the lower end because you’ve got a lot of expenses coming up, but your cash flow is super strong because the business has been booming lately. You can rest easy in the knowledge that you’ll eventually generate the cash you need to be given enough time. Use this understanding to build a solid plan for getting back into the black moving forward, as well as negotiate with creditors if need be.

When you truly understand the difference between these two concepts, as well as how they relate to and affect one another, you will always know how well your business is really doing. How are you seeing to the health of your profit margin moving forward?

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