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We talk a lot about Cash flow and maybe you are familiar with that concept, and make sense in your mind because that means everyday cash, but did you ever think of another type of capital you need to consider when taking business decisions or understanding the workflow of your company? Well, today you will be able to understand what cash flow is and what working capital is, and how you can capitalize on both.

Let’s start by saying that cash flow reflects the amount of money that your business generates within a set period. Your cash flow shows you how much you’re bringing in, and how much money is flowing out. Cash flow also shows you how much money you have in hand to reinvest in your company.

Working capital demonstrates your ability to pay off immediate liabilities. Your working capital can (and will usually) fluctuate over time, but it’s not the kind of metric that you’d use to make future projections of your company’s solvency. Think of working capital as a more “Just in Time” way to evaluate whether or not your company is cash positive.

When Working Capital affects Cash Flow

To understand how these two align and can be positive or not for your business, you need to know that working capital does more than reflect your company’s current ability to pay off debt and sustain operations. It also helps creditors understand how a would-be borrower takes in revenue, spends its money, and whether or not it is likely to remain solvent in case of an emergency or market downturn.

You’re less equipped to deal with difficult times if your company operates with negative working capital. You may still have positive cash flow on a long-term basis, but you may not be able to sustain your business operations if your cash flow dips. There are instances in which a business might be doing fine despite having negative working capital — usually if it’s just made major investments in its own growth — but these kinds of examples are definitely the exception to the norm. Usually, insufficient working capital means that your cash flow is going to need to be much more positive than it would be otherwise.

Lenders are interested in how your company’s working capital and cash flow affect one another, too. In fact, they’ll likely make a decision on your loan request based on what they see. Borrowing money increases your cash flow, but not in a way that improves your working capital. You’ll see a short-term bump in the cash you have in hand, but you’ll have to reflect the debt repayment in your working capital evaluations. This could make lenders more reluctant to finance your business.

Putting all the pieces together

It’s just as important to understand your company’s working capital as it is to keep on top of its cash flow. A cash flow forecast Predict provides you with detailed, near-real-time information on your company’s financials — including your current and quick ratios— along with other insightful analyses and breakdowns of your income and expenses. Your risk score, featured within the analysis dashboard, gives you an indication of how positively or negatively prospective lenders might view your business’ financial health.

Always consider the importance of having a balance between these 2, because much of the business decisions you make need to pass under the filter of cash flow and working capital.

If this blog helps you to understand a little more about your business, follow us on social media, you will find useful information like this every week, also wait for part 2 to learn more about this topic.