Treasury Management · July 17, 2020

How Operating Cash Flow and Working Capital Impact Your Business

One of the most difficult aspects of running a business is making sure you have the operating cash flow required to be successful. While your exact needs will vary depending on whether you're an early-stage startup or an established company, it's important to understand the differences between cash flow and working capital so you can manage both in a way that helps your business achieve its goals.

Defining cash flow versus working capital

Cash flow is what it sounds like—the amount of money coming in and going out of your business in terms of income and expenditures.

Working capital is the money a company has available to cover basic business expenses including employee payroll and inventory. If your company's current assets—including cash, outstanding customer invoices and inventory—outweighs your liabilities, such as bills and accounts payable, you have working capital.

While cash flow tells you how much money your business has on hand over any given period, working capital takes into account assets and liabilities. Because working capital includes any outstanding debt compared to current assets, it provides a good snapshot of your business's current financial situation.

How these concepts affect business outcomes

It's important to actively monitor and manage your company's cash flow and working capital to ensure operations remain on solid ground. For example, if you run out of available cash, you run the risk of not being able to meet short-term obligations, including buying inventory and paying employees. Or you might find you've made overly optimistic estimates about future sales and revenue, and these projections could have you working off an unrealistic budget. It's also possible to put the business's operating cash flow at risk by being too passive about collecting payments from clients.

Making sure your decisions promote healthy levels of working capital and cash flow in scenarios like these will help you avoid running into shortfalls.

Best practices for managing capital

There are several key principles that you can follow to ensure your cash flow management practices set your business up for success.

  • Keep track of your cash. Create and regularly update a cash flow statement to help keep track of revenue and expenses during specific time periods, such as a month or quarter. Having a regular readout will help you anticipate and plan for slower periods.
  • Have cash reserves. Try to create a cushion of at least two months of operating expenses in your business account. This will help protect you from unexpected delays in payments from clients.
  • Streamline payment collection. Diligence in invoicing and collecting payments from customers can go a long way. Ask your financial institution if they offer options to automate invoicing and payment processing.
  • Control business spending. While extra capital can help your business go out and generate more revenue, overextending too much can put your business at risk. Create and stick to a budget that makes sense based on each month's regular income and expenses. Having this visibility will help you understand if you really do have the extra capital to spend on growth right now.
  • Rely on a rational sales forecast. While many businesses' sales are cyclical in nature, it's important to set realistic projections for future income. Being overly optimistic about future sales could cause you to order too much inventory or bring on additional staff you can't afford, potentially leading to financial strain.

Working capital and cash flow are important parts of your business's financial health. Taking these steps to manage them will keep your finance operations running smoothly, so you can focus on the day-to-day activities that help your business flourish.


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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.