In the early days of a startup company, the main concern is making money. You might not bring in enough to pay back your loans right away, but making any money is always a nice start. Problems arise, however, when business owners fail to differentiate between cash flow and working capital. The difference is small enough and the words have similar implications, but a steady cash flow isn’t going to matter if you don’t have the capital necessary to make your business profitable. Understanding how to analyze the two can make a big difference in company’s ability to increase revenue and be sustainable.
Money Earned and Spent
On a very basic level, this is the definition of cash flow. The money you earn through your products or services is then spent to cover basic overhead costs. If you’re able to make more than you spend, your cash flow will be steady and can help lead your company towards growth. What’s important to remember is that this equation doesn’t account for money that has already been spent in the form of a loan. If you borrowed money to pay for the ranges in your restaurant, then the money you make from selling steaks has to cover more than just the cost of buying more meat. This is why working capital has to be factored in when trying to accurately gauge your revenue. If you have outstanding bills that have to be paid in order to maintain you operation, your net worth will look a lot different in contrast to your monthly cash flow.
Just like with your debts, assets have to be calculated into your overall worth. If you own all of the equipment you use, those are assets that add to your company’s value. When you have a summary that shows all of your accounts, credits and assets, as well as the debts and liabilities, then you can see whether or not your company is stable and operating with enough working capital. Keep in mind that the worth of your assets doesn’t always translate to financial stability. If your cash flow isn’t covering a loan that needs to be repaid, but the only asset you have to liquidate is the food truck from which you do business, that’s not an ideal situation.
When you boil it down, your cash needs to flow in order for you to have enough capital to do the work. Even then, you need to have all aspects of your finances under control to actually feel secure about your working capital.