A business can be profitable, have plenty of work coming in and still find itself short of cash.
That’s because making a profit doesn’t necessarily mean the money is available when you need it. Cash might be tied up in stock, sitting in unpaid invoices or needed to meet upcoming supplier payments.
Understanding working capital and cash flow can help you see what’s really happening within your business finances. While the two are closely connected, they measure different things – and knowing the difference can help you identify potential financial pressure before it becomes a bigger problem.
What Is Working Capital?
Working capital is the difference between your business’s current assets and current liabilities.
The calculation is:
Working Capital = Current Assets – Current Liabilities
Current assets are resources you expect to use or convert into cash in the short term, such as:
- Cash in the bank
- Outstanding customer invoices
- Stock or inventory
- Other short-term assets
Current liabilities are financial obligations that typically need to be paid in the short term, including:
- Supplier invoices
- Wages
- Tax liabilities
- Short-term borrowing
- Other outstanding bills
If your current assets are greater than your current liabilities, you have positive working capital. This generally indicates that your business has sufficient short-term resources to meet its upcoming obligations.
However, working capital alone doesn’t tell you how much cash is actually available in your bank account.
That’s where cash flow comes in.
What Is Cash Flow?
Cash flow is the movement of money into and out of your business over a period of time.
Cash inflows might include customer payments, sales and other income, while cash outflows could include wages, supplier payments, rent, tax and loan repayments.
When more cash enters your business than leaves it, you have positive cash flow. When more is leaving than coming in, you have negative cash flow.
A period of negative cash flow isn’t necessarily a sign that a business is performing badly. Businesses can experience temporary cash flow pressure when investing in growth, buying stock ahead of a busy period or waiting for customers to settle invoices.
The important thing is understanding why the shortfall has occurred and how it will be managed.
Working Capital vs Cash Flow: What’s the Difference?
The simplest way to think about the difference is that working capital is a snapshot, while cash flow measures movement.
Working capital looks at what your business currently owns or is owed compared with what it needs to pay in the short term.
Cash flow looks at when money actually enters and leaves the business.
This distinction matters because having healthy working capital doesn’t necessarily mean you have enough cash available today.
For example, imagine your business has:
£100,000 in current assets
£70,000 in current liabilities
Your working capital would be:
£100,000 – £70,000 = £30,000
On paper, the business has positive working capital of £30,000.
But imagine £50,000 of those current assets consists of customer invoices that won’t be paid for another 60 days. If you have £25,000 of wages and supplier bills due next week, you could still experience a short-term cash flow problem.
Your overall financial position may be healthy, but the timing of money coming in and going out doesn’t match.
That’s why businesses need to monitor both working capital and cash flow.
Can a Profitable Business Have Cash Flow Problems?
Yes. In fact, growth itself can sometimes put pressure on cash flow.
Imagine you win a large new contract. To fulfil it, you need to buy additional stock, hire temporary staff and increase production.
Those costs may need to be paid immediately, while your customer might not settle their invoice for 30, 60 or even 90 days.
The contract may ultimately be profitable, but you still need enough cash to cover the costs of delivering it.
Similar problems can arise when:
- Customers take longer than expected to pay
- Sales increase rapidly and more stock is required
- Seasonal businesses experience quieter trading periods
- Unexpected costs arise
- Several major payments fall due at the same time
- Businesses invest in equipment, staff or expansion
This is why profit alone doesn’t provide a complete picture of financial health.
How Does Working Capital Affect Cash Flow?
Changes in working capital can have a direct effect on the amount of cash available within your business.
For example, if your inventory increases significantly, more cash may become tied up in stock. If customers take longer to settle invoices, money remains within your accounts receivable rather than reaching your bank account.
On the other hand, reducing excess inventory or collecting customer payments more quickly can release cash back into the business.
Understanding these movements can help you identify where cash is being tied up and where improvements could be made.
How to Improve Working Capital and Cash Flow
There isn’t a single approach that will work for every business, but several areas are worth reviewing.
Manage Inventory Carefully
Holding too much stock can tie up money that could otherwise be used elsewhere in the business.
Regularly reviewing stock levels, identifying slow-moving products and forecasting demand can help you avoid unnecessary inventory while maintaining enough stock to meet customer requirements.
Invoice Customers Promptly
The sooner an invoice is issued, the sooner it can be paid.
Clear payment terms, accurate invoicing and a consistent process for following up overdue accounts can all help reduce the time between completing work and receiving payment.
Review Supplier Payment Terms
The timing of your supplier payments can also affect cash flow.
Where appropriate, negotiating payment terms that better match your own trading cycle can give your business more flexibility. Any changes should be balanced against maintaining strong supplier relationships and meeting agreed obligations.
Forecast Your Cash Requirements
Cash flow forecasting can help you anticipate periods when outgoing payments are likely to exceed incoming cash.
Looking ahead at expected sales, customer payments, wages, tax, supplier costs and other commitments gives you more time to prepare for potential gaps rather than reacting when cash becomes tight.
Keep an Eye on Working Capital
Working capital shouldn’t only be reviewed at year-end.
Monitoring your position regularly can help you identify changes such as increasing debtor days, rising inventory or growing short-term liabilities before they create more significant cash flow pressure.
When Can Business Funding Help?
Good cash management should always come first, but even well-managed businesses can experience temporary funding gaps.
Seasonality, delayed customer payments, unexpected expenses and rapid growth can all create situations where money needs to leave the business before sufficient cash comes in.
In these circumstances, external finance may provide additional flexibility.
For example, funding could help a business:
- Purchase stock ahead of a busy trading period
- Cover the upfront costs of fulfilling a new contract
- Manage a temporary gap between customer and supplier payments
- Invest in equipment or expansion
- Meet unexpected business expenses
The right funding solution will depend on your circumstances, how much you need and what you intend to use the finance for.
Supporting Your Working Capital with Shire Funding
If cash flow timing is limiting your ability to operate or take advantage of a new opportunity, at Shire Funding we help you explore your business finance options.
Get in touch with our team to discuss business funding solutions including secured and unsecured business loans and merchant cash advances, and with our blend of brokered and own-book funding solutions we’re able to meet our customer’s needs, fast.
Depending on the funding solution and your circumstances, finance could provide the additional working capital needed to manage a short-term cash flow gap or support your next stage of growth.
What we offer:
- Fast decisions often within hours
- Fixed, competitive rates
- Simple documentation and clear terms
- Support from an experienced team that takes the time to understand your business
Let’s Talk About Your Next Step
At Shire Funding, we believe every business deserves the chance to grow without unnecessary financial stress. Reach out today for a free quote and discover how our funding solutions can help you stay ahead.