A business must optimize its working capital and possess adequate cash flow to sustain uncertain events. Every firm undertakes certain financial transactions every year and enters them in the books of accounts. The bookkeeping and accounting services of the company aim at maintaining records accurately and helping the business in tracking its income and expenses. However, if the two terms feel similar to you, you are highly mistaken. Let us differentiate between cash flow and working capital for better understanding. Cash flow refers to the inflow and outflow of money in the organization. It involves actual cash spent as expenses and added as income. On the other hand, working capital in accounting services shows the difference between current assets and current liabilities. It shows its liquidity position and ability to pay off its short-term obligations with corresponding assets. While cash flow involves only cash movement, working capital involves:
Cash flow does not reflect the actual financial picture of the business because it does not consider other elements. It only shows how much cash lies with the industry at a time. Working capital involves bookkeeping and accounting to demonstrate its ability to pay off its debt obligations. Positive working capital shows the company has enough assets to cover liabilities, whereas negative tells the opposite. Cash flow is a bird-eye view of your finances. While your business may not have adequate cash flow, it can pay off its dues timely if it has substantial working capital. Similarly, if the company has a good amount of money, but its working capital is negative, it can generate more cash and turn it into positive. A company's bookkeeping and accounting services help them get a clear view of its working capital and cash position. Both are complementary and may face difficulties in surviving without another. The incoming and outgoing cash itself does not give an overall view of its profitability and liquidity. It does not consider the debts owed and paid later. Similarly, the working capital takes every current asset and liability into account. However, relying too much on assets other than cash can negatively affect the company. Therefore, companies should optimize their cash flow by turning their receivables into cash on time and paying off their suppliers for a healthy working capital cycle.