Cash flow and working capital represent two serious measures of a company’s capacity to meet its financial responsibilities. By working these two, an owner of the business can determine the likelihood of his business being able to pay its future upcoming bills. Cash is the amount of cash a company can generate within a specific period whereas; working capital is the difference between the current assets and current liabilities. Therefore, this research paper is determined to analyse the concepts of working capital management and cash flow management by contrasting their similarities and differences. It’s also determined to analyse the importance of these concepts to a success of business.
Some of the differences between a cash flow and working capital include; cash flow is used to measure the ability for the company to generate cash over a specified period while working capital is a case of the present situation. Working capital makes available an brilliant idea about how simply the company can pay gradual liabilities; these are the expenses that a company will meet in its day to day affairs while cash flow is a forward-looking measure ( Nobanee and Al Hajjar, 2009).
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It’s important for a company to have sufficient management of working capital so as to avoid financial insolvency that can lead to legal problems for the business, liquidation of assets and potential bankruptcy of the entity. A good management of the working capital enables the company to not only cover its day to day financial obligations but also to help the company to boost its earnings. According to Nobanee and Al Hajjar (2009), the working capital uses ratios that help the company to identify areas that require focus to maintain liquidity and profitability.
With the management of cash flow, the company cash position can be determined over a period. The cash flow is important to determine the problems of a company’s liquidity. It is also present to determine the project or company’s rate of return over time. This will help the organisation in planning. This accounting way is important to determine the timeliness of cash flow into and out of the project which is used to input in the financial models such as internal rates of return and net present value.
Nobanee, H., & Al Hajjar, M. (2009). Working capital management, operating cash flow and corporate performance.