Money is a big concern for any business. When it comes to money, most businesses will have two primary things to worry about, cash flow and usable or working capital. However, these are often confused by business owners. Read on for a definition for each one, their differences, and how to improve their values.
your cash flow is the money that flows into your business and out. Positive cash flow, the desired goal, is when more money comes in than goes out. On your cash flow chart, you should see various incomes and expenses, such as sales, operating costs, asset sales, collection of outstanding accounts, and payments to suppliers.
While this seems simple enough, many business owners focus too much on the money coming in. Worse, they confuse the total amount coming in as profit. While you want to have more money coming in, it doesn’t mean that all of the money coming in is going towards your profit.
Usable or working capital is the amount of money or assets that your business has in the bank. This can easily be calculated by deducting your liabilities from your current assets. A negative result is a bad sign because it can indicate that your business is in debt. When you need more immediate capital, you have options such as getting a loan, increasing your profit, or finding another source of immediate funds.
You can create a healthy cash flow and still have very little capital on hand. This is because you can have a lot of money coming in, but you can also have many financial obligations. Meanwhile, you can also have a lot of capital on hand without much cash flow.
Boosting Cash Flow
When you want to boost your cash flow, make sure you collect all outstanding invoices for your company. For instance, you can set firm boundaries that will encourage customers to pay you promptly. You could also create incentives for getting staff to help collect payments on time.
Increasing Usable Capital
To increase the amount of capital you have on hand, you can reduce the amount of money you have going out. For instance, you can work with a lender to decrease your loan payments. You could also try to delay loan payments for as long as possible.
If you are a business owner, you need to understand the difference between cash flow and usable capital. This can help you bring more revenue into your business so you can succeed.