Understanding Them Is Critical for Anyone Who Wishes Their Business To Thrive.

Both working capital and cash flow are crucial to the running of a business. They hand-in-hand to help you not only meet your current expenses but to also accurately forecast your cashflow. While these two might seem to have some overlap, they are indeed two specific metrics. In this article, we provide an overview of the difference between working capital and cashflow and some helpful tips to help you better manage them within your business.

What is Cash Flow?

Cash flow is what it sounds like precisely: the cash that is flowing in and out of your business. It projects all income and expenses over a specific timeframe. If you have trouble calculating your company’s cash flow, do a simple Google search for a cash flow tool to help.

One crucial factor is that cash flows do not equal net profit, as most companies usually sell on credit and borrow money after. This is because it doesn’t subtract your liabilities; however, it will show the amount of cash you generate in that timeframe. Examples of cash flow are accounts receivable, accounts payable, inventory; as well as invoices, loan payments.

What is Working Capital?

Working Capital refers to the overall operating money available after deducting the debts from your business. The calculation is done by subtracting your company’s current assets from current liabilities. The term “current” here refers to assets that you can convert into cash or liabilities due in less than 12 months. Current liabilities include inventory, equipment, investment value, cash on hand, accounts payable, deferred revenue, and debt.

One important part of any finance management is having access to positive working capital, as it can help your business mitigate any unexpected events. The current ratio is the benchmark that provides a good indicator of your working capital. The current ratio measures all of your company’s assets against liabilities, whether short-term or long-term; therefore, you must know how to carefully read a balance sheet to check for the correct ratio and make informed decisions.

So, What’s The Difference Between These Two?

The primary difference between cash flow and working capital is that working capital provides an overview of your company’s current financial situation. In contrast, cash flow tells you how much cash your business can generate over a specific period. Your monthly or quarterly cash flow will differ from the amount of money generated in a year. As a result, working capital gives you a good idea about how quickly your company can pay immediate liabilities, while cash flow is more of a forecast function.

Nonetheless, if your working capital is low but still has a strong cash flow, your company should be able to generate sufficient cash provided there is enough time. However, if creditors aren’t willing to give you enough time, you may be facing some dire financial difficulty, including the possibility of bankruptcy.

How to Manage Cash Flow and Working Capital Better

1. Keeping detailed financial records meticulously

Keeping accurate financial records throughout the life of your business operation so you can make the right financial decisions.

2. Optimize your accounts receivable/accounts payable tasks

Set up systems that enable your business to get paid as soon as goods and services are delivered to further generate cash flow.

3. Make smarter inventory decisions

If you are a small business owner, make sure you have the appropriate amount of inventory to satisfy sales orders without investing too much money into purchasing products that won’t fly off the shelves.

Want to know if you’re eligible for a loan to expand your business operation? Talk to our advisor to find out more.

Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.