Businesses are always open to the idea of attracting more investors and acquiring additional fund. If you are in the process of working on this, keep in mind that two of the first things that potential investors and money lenders will look into your business are your working capital and cash flow. It is essential that they look into these two since these are good indicators of your company's financial health and its ability to fulfil its obligations. In general, most businesses are capable of generating good profit. However, some are unable to generate enough cash. If your company's cash flow and working capital are analysed by the potential investors and lenders, they can predict whether your company can pay its financial obligations with ease or with difficulty. Working Capital And Cash Flow To understand these two financial concepts, it is best to understand what they are first. Working capital pertains to the difference between your company's current assets and liabilities. Current assets refer to assets that can be converted to cash; current liabilities, on the other hand, refer to obligations that are due within the year. If a business has a huge working capital, it usually means that it has enough resources to cover its financial obligations. Conversely, if a company has little or negative working capital, it may encounter various difficulties to meet its financial obligations. Cash flow, on the other hand, refers to all money that a business generates within a given time frame. However, cash flow is rarely equal to your company's net profit since it is highly likely that you sell on credit and borrow money. In addition, you may also use the cash that your company generates through sale for other purposes such as the acquisition of supplies or assets. It is therefore not recommended that you compare your cash on hand at the beginning and end of an accounting cycle. Your accounting department should prepare a statement of cash flows. But what exactly are the differences between the two? To begin with, working capital can easily give you, your lenders and possible investors with a quick insight into your company's current financial situation. Cash flow, on the other hand, is an efficient indicator of your company's ability to generate cash within a period of time, whether monthly, quarterly or annually. In simpler terms, your company’s working capital will show how easy or difficult it will be for your company to pay pending liabilities over the short term while cash flow is more geared toward the future or the long run. By Calvin Modine, a business financing advisor, with additional details about working capital and cash flow from the website of HSBC Qatar.
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