When studying business or actively participating in the business world, there are many similar terms that come up. As similar as they may sound, it is often the term’s differences that are most important. There are also some terms that mean similar things but look different. Let’s take a look at the difference between cash flow and working capital.
Cash flow is the amount of money that goes in and out of a business during a set point in time. This “cash” doesn’t need to be actual paper money. When it comes to money coming into the business, paper money, checks, and digital sales (credit cards/debit cards/cryptocurrency) all count towards cash flow. However, when it comes to money coming out of a business, credit cards (and other forms of buying on credit) do not count until the bill is paid.
While cash flow uses a lot of the same elements that are used to track income and expenses, it is not the same thing as a business’s overall profit. This is mostly due to the fact that credit expenses are not included in the cash flow equation. However, it can give a rough idea of what the business’s net profit should be.
At first, working capital sounds the same as cash flow. In the most basic sense of the term, working capital is what is left over when the business’s liabilities are subtracted from the assets. Unlike cash flow, this does include expenses that are paid with a credit card or a line of credit. However, it doesn’t always work well as an estimate for a business’s net profit.
It cannot estimate net profit because a business’s assets include much more than money (both in the store, in the bank, and more). Assets include just about everything a business owns. This includes inventory, machinery, sales racks, equipment, and anything the business owns. Equipment that has been leased or rented does not count towards a business’s assets, at least as far as a bank is concerned.
Having a negative cash flow for a short amount of time isn’t a good thing, but it isn’t the end of the world either, so long as a business can make up for lost profit soon. Having negative working capital is worse, as it most likely means that a business cannot keep up with its expenses. Ideally, both will always be positive, but in most cases, businesses will not see any kind of serious profit for months or even a year after the business is established.