Spenda
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.*
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.
Related Articles
Having the ability to get paid quickly is key for any business, and yet late invoice payments continue to be a burden for many Australian businesses, costing around $1.1 billion per year.
Invoicing is a core component of your business that can either lead to stable cash flow or late payments. And while it may feel like all of the power is in your debtor’s hands when it comes to getting paid on time, that isn’t always the case.
With a more digital and connected world, we have seen a surge in the adoption of eCommerce technologies and contactless payments.
