An Introduction to Working Capital and Cash Flow

If you own and operate a small business, you know how important critical thinking skills, time, patience and dedication are. These aspects are essential for running a successful business, but you must additionally have proper knowledge and understanding of how other things work. For instance, it is imperative to know the difference between cash flow and working capital if you want good decisions to be made for your business when lenders and business partners prepare financial statements. However, many people utilize the two terms interchangeably, and that can lead to misunderstanding and negative decisions.

To make sure your business continues to run well, you must understand the details and aspects of each term so that you use them correctly. Firstly, you should understand what cash flow is and what a cash flow summary is used for. Take a certain amount of time, such as a month or week in your business into consideration. In that week or month, how much money can your business generate to cover your expenses? This is referred to as a cash flow summary, and cash flow is how much cash is coming in and moving out of your business. Typically, you will generate one of these summaries for a quarter or perhaps a year. It is important to note that this summary will not take your assets into account and it will now show how they can impact your business’s financial responsibility. In essence, the cash flow summary is for determining how much money can come from your business in a certain amount of time.

Working capital, on the other hand, is different and can show your other things. For instance, it involves liabilities and assets. While cash flow accounts for expenses, working capital has the ability to show you the comparison between your outstanding debts and your current assets. In order to better understand this difference, take this example into consideration. If you currently have a loan of 5,000 dollars and your customer base starts to decline for whatever reason, you will still have to make payments on that loan. How working capital helps is that it will show you which assets can be liquidated to resolve your debt. So, if you are experiencing a sudden decline or a tough time, you can use the capital report to your advantage to help you pay the debt. Now that you know the difference between these two business terms, you can ensure you are making good financial decisions.