Working Capital vs. Cash Flow: What’s The Difference?

For tech entrepreneurs, managing company finances means staying on top of two critical metrics: working capital and cash flow. While sometimes confused, they measure different aspects of your startup's financial wellness. Understanding both is essential for maintaining smooth day-to-day operations and fueling long-term growth.

For the Founder-CEO-CFO that’s wearing a lot of hats, we break down these two important financial metrics to give you a solid foundation for building a successful business.

Definitions

Working Capital

Working capital is a measure of your company’s short-term liquidity and operational efficiency. It represents the readily available assets your business has to cover its short-term obligations.

Formula:

{Working Capital} = {Current Assets} - {Current Liabilities}

• Current Assets: Cash, accounts receivable (invoices due), inventory (if applicable), and prepaid expenses — assets expected to be converted into cash within one year.

• Current Liabilities: Accounts payable (bills due), short-term debt, and accrued expenses — obligations due within one year.

If you have positive working capital your current assets exceed your current liabilities, which indicates a healthy ability to fund operations. Negative working capital is a signal that your business is at risk of being unable to meet short-term debts.

Cash Flow

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of your business over a given period. It tracks the actual movement of cash, providing insights into your business’s liquidity, financial health, and operational efficiency.

Cash flow is typically broken down into three categories on the Statement of Cash Flows:

• Operating Activities (CFO): Cash generated from or used in the normal day-to-day running of the business (e.g., revenue from subscriptions, payments to vendors and employees). This is often the most important metric for a SaaS startup.

• Investing Activities (CFI): Cash used for or received from investments (e.g., purchasing software, equipment, or selling assets).

• Financing Activities (CFF): Cash used for or received from financing the business (e.g., taking out loans, issuing equity, or paying dividends/debt).

For a more detailed guide on this topic, read Cash Flow Basics for SaaS Startups.

Examples

To clarify the distinction between working capital and cash flow, consider the following examples:

Working Capital Example

• On the last day of the month, a SaaS company has $50,000 in its bank account (Current Asset) and $100,000 in Accounts Receivable (invoices sent to customers, Current Asset).

• It also has $80,000 in Accounts Payable (bills due, Current Liability) and $20,000 in accrued payroll (Current Liability).

Working Capital = ($50,000 + $100,000) - ($80,000 + $20,000) = $150,000 - $100,000 = $50,000 (Positive Working Capital)

This indicates the company has enough short-term assets to cover its short-term debts.

Cash Flow Example

• Over the entire month, the company received $70,000 in subscription payments (Cash Inflow from Operating Activities) and paid $60,000 for salaries and hosting (Cash Outflow from Operating Activities).

• They also spent $5,000 on new office software (Cash Outflow from Investing Activities).

Net Cash Flow = $70,000 - $60,000 - $5,000 = $5,000 (Positive Net Cash Flow)

This shows that more cash came into the business than went out over the period. Note that this cash flow figure doesn't include the $100,000 in Accounts Receivable, as that cash hasn't actually been received yet.

How is working capital different from cash flow?

Working capital is like the fuel in your car's tank right now. Cash flow is the speed and direction in which your car is moving — accelerating or decelerating. The side-by-side comparison below will help you better understand the key differences.

	Working Capital	Cash Flow
What it measures	A snapshot of short-term financial health and liquidity at a specific point in time.	The movement of cash in and out of the business over a period of time.
Primary focus	Liquidity and operational efficiency.	Solvency and short-term survival.
Timing	Static (a balance sheet item)	Dynamic (a periodic activity/statement item).
SaaS relevance	Crucial for covering immediate expenses like payroll and cloud hosting before subscription payments arrive.	Critical for covering monthly operating burn and forecasting runway.

Managing Working Capital and Cash Flow, Together

Changes in working capital components immediately increase or decrease available cash. Working capital acts as a buffer, ensuring enough liquidity to cover short-term expenses, while cash flow indicates the efficiency of converting those assets into cash over time.

For startup leaders, both metrics serve distinct, yet interconnected, strategic purposes.

Working capital for operational health

Founders use this to ensure they have enough short-term capital to cover the gap between paying their own bills (servers, salaries) and receiving payments from customers (Accounts Receivable).

Managing the working capital cycle — the time it takes to convert sales into cash — is vital. A predictable SaaS business model with low inventory often allows for tightly managed, or even negative (and efficient), working capital, where customer prepayments (Unearned Revenue) can fund growth.

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RELATED

• Find out what to do if you need to fund working capital in a crunch.

• The working capital turnover ratio measures how efficiently a business turns its working capital into increased sales revenue — learn how to calculate it and get deeper insight into your startup’s operational efficiency.

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Cash flow for growth and runway

Founders use cash flow, particularly cash flow from operating activities (CFO), to track their runway — how long the business can survive before running out of money.

• Strong positive operating cash flow indicates a highly sustainable, self-funding business.

• Negative cash flow is common and expected in high-growth startups, but founders must monitor it to ensure burn rate is controlled and that cash is being efficiently invested in growth.

RELATED: Startup Runway Explained

How Can Startups Improve Cash Efficiency?

The relationship between working capital and cash flow — there is always a cycle between cash flow and working capital — is central to developing financial discipline within a SaaS startup. A positive cash flow increases the working capital, from which money is subsequently withdrawn to balance the positions in the accounts payable (which in turn creates a negative cash flow).

If your goal is ultimately to boost your startup’s cash efficiency and improve cash flow, consider the following tactics:

1. Prioritize annual contracts

Focus your sales team on selling Annual Recurring Revenue (ARR) contracts paid upfront. This immediately shifts your working capital by increasing your cash (Current Assets) and generates a large, immediate positive boost to cash flow.

• Impact: This action has a powerful dual effect. It significantly boosts your cash flow in the current period and immediately strengthens your working capital (as cash is a Current Asset). This is often the most effective way for a SaaS company to finance its own growth.

2. Optimize billing and collections

Implement faster invoicing cycles and stricter Accounts Receivable policies. For example, consider offering small incentives for early payment or introducing stricter penalties for late payments. The faster you collect from customers, the shorter your working capital cycle, and the better your operating cash flow.

• Impact: A faster collection cycle directly improves your operating cash flow and ensures your short-term assets are more liquid.

3. Stretch accounts payable, judiciously

Negotiate longer payment terms with non-critical vendors where possible (e.g., from Net 30 to Net 60 or Net 90). This temporarily increases your Current Liabilities, which reduces working capital but improves short-term cash flow by allowing you to hold onto cash longer. The key to doing this wisely is to maintain good relationships with key vendors, while strategically managing payment timing for others.

• Impact: This allows your business to hold onto its cash for a longer period, which temporarily improves your short-term cash flow. However, remember that technically, increasing Accounts Payable (a Current Liability) reduces your calculated working capital, so this is a tactical short-term cash management move that must be monitored closely.

4. Model your runway

Create a monthly cash flow forecast that projects your cash flow from operations (CFO) for the next 12-18 months. This is your most critical tool for managing expenses, controlling your burn rate, and ensuring you know when to raise your next round of funding.

• Impact: Forecasting cash flow allows you to proactively manage your expenses, control your burn rate, and understand how long you can survive before running out of money. This foresight is essential for making informed hiring, investment, and fundraising decisions.

5. Consider non-dilutive financing

If you’re planning SaaS growth initiatives that will create a temporary strain on working capital (e.g., hiring a new sales team), non-dilutive options like revenue-based financing can provide the additional capital you need at reasonable rates that deliver good ROI.

• Impact: Non-dilutive financing can inject the necessary capital to bridge the temporary gap between your investment (the cash outflow) and the positive cash flow that the investment will eventually generate. This also allows you to execute on growth plans without sacrificing valuable equity.