Among the important responsibilities of a business owner is to make sure that your firm is capable of fulfilling its financial obligations. To efficiently determine if your company has this capacity, there are actually 2 significant things that can help you - these are working capital and cash flow.
Plenty of companies today generate a high amount of income but still don't meet all their financial obligations. It is for this very reason that it becomes a must for business owners like you to monitor as well as analyze both. If you do so, you will have an idea about your company's capacity to make payments or its current financial health.
Cash Flow & Working Capital – What Are They?
Cash flow is the amount of cash your business has generated at a certain time. Remember that oftentimes, the cash flow along with the net profit won't ever become equal since companies sell their wares on credit. Apart from that, they borrow money also. Furthermore, the cash that comes in might be reinvested in the business or perhaps used for acquiring different assets. This further means that your account can't just compare the cash at hand at the start and end of an accounting period in order to arrive at the cash flow. Rather, he must prepare the statement of cash flows.
On the other hand, working capital is the difference between the current assets with that of the liabilities of your company. When your company has a huge working capital, this means that its assets can cover its financial obligations. But if your working capital is negative, this means that your firm can't fulfill its financial obligations with all the assets you have on hand.
Plenty of companies today generate a high amount of income but still don't meet all their financial obligations. It is for this very reason that it becomes a must for business owners like you to monitor as well as analyze both. If you do so, you will have an idea about your company's capacity to make payments or its current financial health.
Cash Flow & Working Capital – What Are They?
Cash flow is the amount of cash your business has generated at a certain time. Remember that oftentimes, the cash flow along with the net profit won't ever become equal since companies sell their wares on credit. Apart from that, they borrow money also. Furthermore, the cash that comes in might be reinvested in the business or perhaps used for acquiring different assets. This further means that your account can't just compare the cash at hand at the start and end of an accounting period in order to arrive at the cash flow. Rather, he must prepare the statement of cash flows.
On the other hand, working capital is the difference between the current assets with that of the liabilities of your company. When your company has a huge working capital, this means that its assets can cover its financial obligations. But if your working capital is negative, this means that your firm can't fulfill its financial obligations with all the assets you have on hand.
Cash Flow Vs. Working Capital
Working capital is more focused on the company’s current financial situation whereas cash flow is on the company’s capability to generate cash within a certain time frame. Apart from that, working capital will show how capable the company is when it comes to fulfilling its obligation over a short term. On the contrary, cash flow is geared toward the long term. This further means that when your company does not have enough working capital but has excellent cash flow, it may generate a sufficient amount of cash when given ample time. But if your creditor won’t provide you with enough time to generate cash, your company might fall into bankruptcy.
About the author: Deon Lewis is a business owner who monitors his company’s working capital and cash flow on a regular basis. He highly recommends checking out www.business.hsbc.ae for more info about financial management and the like.
Working capital is more focused on the company’s current financial situation whereas cash flow is on the company’s capability to generate cash within a certain time frame. Apart from that, working capital will show how capable the company is when it comes to fulfilling its obligation over a short term. On the contrary, cash flow is geared toward the long term. This further means that when your company does not have enough working capital but has excellent cash flow, it may generate a sufficient amount of cash when given ample time. But if your creditor won’t provide you with enough time to generate cash, your company might fall into bankruptcy.
About the author: Deon Lewis is a business owner who monitors his company’s working capital and cash flow on a regular basis. He highly recommends checking out www.business.hsbc.ae for more info about financial management and the like.