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The difference between working capital and cash flow and how to better manage these in your business

11 August - 4 min read

Cash flow is critical for any business, but there’s another major piece of the puzzle you need to get right as well: working capital. Your business’s working capital and cash flow work together to not only help you meet your current expenses but to also accurately forecast your cash flow. A decrease in your working capital can inhibit your ability to grow but you won’t be able to proactively manage these times if you don’t have an accurate view of the money moving in and out of your business.

In this article, we provide an overview of the difference between working capital and cash flow and some useful tips to help you better manage them within your business.

What is working capital?

Your working capital is the difference between your business’s current assets and liabilities. The accounting definition of “current” is assets you can convert to cash and liabilities due within 12 months. For most businesses, assets that will convert into cash quickly are inventory and accounts receivable. Liabilities may include things such as short-term loans. 

Having a large amount of or increases in your working capital means that you have adequate assets to pay for your current and future liabilities. A decline in your working capital could make it difficult to cover your liabilities, which may signal the need to make some changes to how you manage your business’s finances.

What is cash flow?

Cash flow is the money that moves in and out of your business. It’s important to note that cash flow doesn’t equate to net profit as many businesses sell using trade credit and use other finance options to supplement their cash flow. To proactively manage your business’s finances, you should always have an accurate short, medium and long term cash flow forecast available. This will help you identify early when finances may be tight so you can take action before it’s a problem.

What’s the difference between working capital and cash flow?

It’s important to understand the difference between working capital and cash flow. Your assets and liabilities drive the amount of working capital in your business. Working capital drives your cash flow. The amount of time it takes to convert your assets into cash is the working capital cycle. The faster and more consistently you can have assets converting to cash, the stronger your cash flow. If you are experiencing tight or negative cash flow due to late payments or stock that isn’t selling, you may be unable to pay your suppliers. 

How to improve your cash flow and working capital management

If you’ve experienced a decline in working capital or your business has tight or negative cash flow, there are a range of levers you can use to unlock cash now and into the future. The table below provides an overview of different options you could  try to manage each.*

Better manage your working capital
Collecting late payments
Follow up all of the late payments owing to your business. Integrated payment solutions, like Spenda, take the fuss out of chasing late invoice payments. It allows suppliers and customers to send automated reminders and easily collaborate on repayments plans.
Move ageing stock by having a sale
If you have capital tied up in ageing stock, you could have a sale to move this stock quickly and convert it to cash. To avoid this problem in the future, an inventory management system will help you accurately forecast what inventory you need to order, when to order and how much to order.
Sell assets and convert these to lease agreements
Look into entering asset buyback and lease agreements. This will involve selling assets such as technology hardware and equipment to an asset financing company who will then lease the assets back to your business. It can help you ensure you have the latest technology while providing your business with cash from the assets you use every day.
Complete thorough credit checks on new customers
Implement processes and systems to complete thorough credit checks on new customers. For large orders, check the customer’s credit score. If a customer has a below average score but you’d still like to trade with that business, offer a lower credit limit to begin.
Better manage your cash flow
Offer discounts for early payment and provide a range of payment options
Providing customers with incentives to pay early along with a range of payment options will help you get paid faster. Spenda’s payment solution helps businesses by providing ease and flexibility to the payment process, including access to multiple payment options such as credit card, bank transfers and on-demand lending.
Send invoices quickly
For businesses that work out in the field, it may be difficult to send invoices quickly. A delayed invoice means delayed payment, so it’s important to set up systems, such as Spenda, that allow your business to take payments on the go and get paid as soon as goods and services are delivered.

Manage your working capital and cash flow with ease

Spenda provides business owners with smarter digital tools to get paid faster and strategically manage their working capital and cash flow. Each go hand-in-hand to ensure you have enough money flowing through your business, while having enough capital available to deliver goods and services to your customers. And because our tools seamlessly integrate with accounting and ERP systems, you’ll enjoy the added efficiencies that come with automated and accurate data sharing across your business. 

*This article is for general information purposes only. Consult a qualified financial advisor regarding any changes to or decisions about your business’s finances.

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