Working Capital vs. Cash Flow: What’s the Difference?
About 50% of small and medium-sized businesses (SMBs) rely on the cash in their bank account to stay afloat, according to a 2025 PYMNTS Intelligence report. The survey also found that only 44% of SMBs have access to financing or working capital funding.
Cash flow and working capital are both important measures of a small business’s financial health, contributing to its stability, flexibility, and short-term growth potential. Knowing how working capital affects cash flow and vice versa can help you better manage your funds so you can move out of surviving mode and into thriving mode.
In this article, you’ll learn more about working capital vs. cash flow, including:
Their major differences
An overview of each metric
How they measure a company’s financial health
How they affect each other
Working Capital vs. Cash Flow: The Key Differences
Essentially, working capital is a bird’s eye view of your finances, while cash flow zooms into operational details. Below are their main differences:
Cash flow shows how much money goes in and out of your business bank accounts. Working capital shows how much money you have to pay for short-term liabilities or expenses.
Measuring your free cash flow can determine if you’re earning more than you’re spending within a given period (profitability). Measuring your working capital can determine if your assets are able to pay for your financial obligations over the next 12 months (liquidity).
Cash flow is recorded on a cash flow statement, while working capital can be calculated using a balance sheet.
What Is Working Capital?
Working capital is the difference between the value of your current assets and current liabilities.
Current assets can be:
Cash on hand (such as petty cash or funds in a checking account)
Cash equivalents (such as Treasury bills or money market funds)
Liquid assets (such as accounts receivables or inventory)
Meanwhile, current liabilities are payments due within the next 12 months. These can include:
Short-term debt repayments
Accounts payable (such as bills and supplier payments)
Wages
How to Calculate Working Capital
You can use your balance sheet to calculate working capital. First, add up all your current assets and current liabilities. Then, subtract your total liabilities from your total assets.
For example, if you have current assets of $100,000 and current liabilities of $50,000, your working capital would be:
$100,000 - $50,000 = $50,000
This means that your business has a positive working capital and is financially healthy because it has more assets than liabilities. You’re assured that you have enough funds to pay for all your expenses within the year.
However, if you have current assets of $80,000 and current liabilities of $120,000, your working capital would be:
$80,000 - $120,000 = -$40,000
A negative working capital could mean you’re struggling to fund your operations.
As such, your business’s working capital is not just a measure of short-term financial health and the company’s liquidity. It’s also a forecast that can help you prepare for disruptions or unexpected events.
You can also consider calculating your current ratio (or working capital ratio), which is current assets divided by current liabilities. This ratio measures your company’s ability to pay for its short-term obligations using its short-term assets. A high ratio is ideal, as it means that the company has more assets than liabilities.
How Working Capital Measures Financial Health
There are some nuances to consider when analyzing working capital. While a positive working capital is generally good, having too much of it for a long time can mean you’re not maximizing its earning potential.
For example, instead of investing in research and development to expand your products and services, you may have a lot of idle cash sitting in your bank account earning no or low interest.
Another potential scenario is that you may have too many accounts receivable (pending invoice payments). This could mean your billing process is inefficient.
Conversely, while having a negative working capital is concerning, it could be temporary. For example, you may have just purchased a fleet of service vehicles, but the income it will generate will pay for it in the next few months.
However, if your working capital has been negative for a long time, you need to check if you’re relying too much on debt and financing. This is important because a debt-heavy company can discourage potential investors and lenders.
What Is Cash Flow?
Cash flow shows you the amount of cash you’ve received (cash inflows) from your business operations and the amount of cash you’ve spent (cash outflows) over a specific period of time (typically monthly). Cash inflows can include sales and investments, while cash outflows can include day-to-day operational expenses, such as utilities and salaries.
Meanwhile, free cash flow is the money left after you’ve paid for your operating expenses. While cash flow shows that you have the funds to sustain your business, free cash flow demonstrates growth because it’s extra money that can be used to repay investors and debts or make further investments in your business.
Cash flow details can be found on your cash flow statement. This financial statement has three sections:
Operating activities: The inflows and outflows from your primary business, such as earnings from sales and salary payments.
Investing activities: These include capital expenditures, which is money used to buy, expand, and maintain physical assets, such as factories, office buildings, and equipment.
Financing activities: This shows cash flow from debt (business loans) and equity (selling stocks or bonds).
How to Calculate Cash Flow
To calculate your net cash flow, use the formula: Net cash flow = Total inflows - Total outflows.
A positive cash flow means you have enough money to fund your operations within that period. Below is an example of a positive cash flow.
Cash Inflows:
Sales revenue: $15,000
Loan proceeds: $2,000
Interest income: $200
Total Inflows: $17,200
Cash Outflows:
Rent: $2,000
Salaries: $6,000
Utilities: $500
Loan repayment: $1,000
Total Outflows: $9,500
Net Cash Flow = Total Inflows ($17,200) - Total Outflows ($9,500) = $7,700
Meanwhile, a negative cash flow indicates that your expenses are higher than your earnings. Below is an example of a negative cash flow:
Cash Inflows:
Sales: $6,000
Investments: $2,000
Total Inflows: $8,000
Cash Outflows:
Rent: $3,000
Utilities: $800
Supplies/materials: $5,000
Marketing: $1,000
Total Outflows: $9,800
Net Cash Flow = $8,000-$9,800 = -$1,800
While temporary ups and downs are to be expected, being negative for most of the quarter or year can be a sign of potential long-term trouble.
How Cash Flow Measures Financial Health
Cash flow analysis involves looking at trends or patterns. A month’s cash flow doesn’t mean much unless you compare it with previous months.
Doing so allows you to see which income stream is doing much better than the others. Conversely, you can identify products and services that are high in expenses but low in earnings.
Cash flow can also help you identify opportunities to save. You can pinpoint expenses that are eating too much of your earnings and adjust accordingly.
Additionally, a consistently negative cash flow can indicate operational inefficiencies. For example, you may need to tweak your invoicing and inventory management to avoid wasting resources.
Just like analyzing working capital, nuance is very important here. A few months of consecutive negative cash flow doesn’t necessarily spell doom. For instance, startups and early-stage companies can initially have money troubles, but that’s because they’re still establishing themselves and solely relying on venture capital or seed money instead of customer sales.
The Relationship Between Working Capital and Cash Flow
Together, these metrics present a holistic picture of your finances. That said, a change in one doesn’t necessarily change the other.
For example, a customer invoice payment can increase cash flow but not change working capital since it’s just a matter of the accounts receivable converting to cash. Both are still considered current assets.
However, there are instances when a small business can have a positive working capital but a negative cash flow (and inversely).
For example, let’s say a small business bought expensive equipment and paid in cash. These machines are now part of the company’s current assets, which resulted in a positive working capital. However, the significant amount of cash used in the purchase caused a negative cash flow for that period.
Meanwhile, a small business may be generally debt-heavy or have a low working capital ratio. However, it can experience a surge in sales during the peak season, resulting in a positive cash flow.
This is why it’s important to consider both metrics. Working capital analysis helps you anticipate financial roadblocks, while cash flow management helps you sustain your daily operations and identify growth areas.
Optimize Your Working Capital and Cash Flow With Backd
Analyzing working capital vs. cash flow can make your business more flexible, resilient, and strategic. However, without access to flexible and affordable working capital financing, it can be challenging to reach your growth potential.
At Backd, we help small business owners get the working capital they need to thrive. Our Working Capital Advance offers up to $2 million in funding, which can be repaid daily, weekly, or semi-monthly. Meanwhile, our Business Line of Credit provides up to $750,000.
You don’t have to worry about your application affecting your credit score because we do a soft credit pull. Plus, you can receive a decision within as little as 4 hours after you submit your application.
Our eligibility requirements include:
$100,000 in monthly revenue
A credit score of 650+
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for one year for a Working Capital Advance and two years for a Business Line of Credit
Apply now to get working capital solutions tailored to your ambitions.
