Maneuvering successfully through the business world often requires a combination of different beneficial traits. One key component in particular is being armed with the right knowledge for the situation. All business owners should strive to stay informed on relevant topics. A lot of special terms are used in the area of business development, and knowing their correct definitions is vital. Though the phrases working capital and cash flow are sometimes used interchangeably, their specific meanings really do matter.
In the simplest terms, a business’ cash flow refers to how much money it brings in and how much it is able to spend in each time period. Basically, it is the amount of money that goes in and goes out of a company. This can be calculated for the week, month or even year. Discerning your cash flow can help measure how much money your company has available to spend on business developments at any given time. It can be deemed positive or negative depending on if your liquid assets are currently increasing or decreasing.
In comparison, judging the working capital of your business compares your current debts with all of your available assets. This takes into consideration the upcoming payments that will need to be made in the future. It is usually looked at in a 12 month time frame. It also looks at assets that can be used to generate cash if a situation arises where it is needed. If necessary, these assets can be liquidated and used to cover necessary payments. This data can give a business owner a clear picture of how the company is currently doing. Generally, the working capital does not consider the expenses that are not covered by loans or credit. This is one of several details in which working capital and cash flow differ from each other. At the same time, it is obvious that both of them play an important role.
When you run your own business, cash flow and working capital are both very important factors. Each fulfill their own role in business finances. This is why you need to know the difference between the two of them. Although these phrases may often be used to refer to each other in casual conversation, when it comes down to taking care of official documentation, the difference really matters. Being properly informed helps you to make the best business decisions where it really counts. Stay on top of your company’s finances and stay headed toward success.