Financing is a major concern for businesses, whether large or small. Two major aspects of business financing, cash flow and working capital, are essential to the viability of a business. Although the two concepts are similar, they do differ from one another. Nonetheless, lacking either sufficient cash flow or adequate working capital is a sign of trouble for any business.
Cash flow refers to the funds that flow into and out of your business. In accounting, positive cash flow refers to more money coming in than going out during a specified period. You can increase cash flow by increasing sales, reducing operating costs, selling an asset, collecting accounts payable faster or delaying payments to suppliers. Many businesses employ a combination of these approaches to create positive cash flow. Many business owners confuse cash flow with profit. While positive cash flow is often a healthy business sign, it does not mean that your business is operating at a profit.
Working capital refers to the liquid assets your business has on hand, that is, cash or financial instruments that you can easily convert to cash. In accounting, you calculate working capital by deducting the liabilities of your business from its assets. If the result is negative, this indicates that your business may not be able to honor its short-term financial obligations. You can increase your working capital by increasing profit, taking out a loan or receiving a cash injection from your stockholders if your business is incorporated.
Working Capital Vs. Cash Flow
Your business can have a positive cash flow but have very little working capital. This is because it is possible for a business to generate a high level of revenue but have a correspondingly high level of financial obligations. On the other hand, a new business may be fortunate enough to hold a large amount of working capital without having had sufficient time to generate much cash flow, either positive or negative.
Generating Positive Cash Flow
Collecting what your business is owed is essential in generating positive cash flow. This includes prodding customers and clients to pay you on time. "Inc suggests providing incentives for staff by tying bonuses or commissions to collecting payment as well as generating sales or contracts.
Increasing Working Capital
To increase working capital for your business, negotiate longer payment terms with a supplier for a particularly large order or obtain a loan or line of credit. Contract with a third party to purchase one or more of your accounts receivable. You will likely pay a premium over what a bank would charge in interest, but the terms for approval are often much less strict, making it an easier avenue of credit for new businesses, "Entrepreneur" states.