In financial management, cash flow and working capital are intertwined. How much cash you have on hand depends on how efficiently you’re managing receivables, inventory, and payables. How much of that working capital you can use depends on how quickly cash is moving through your business.

Below, we’ll provide a detailed look at how working capital and cash flow interact and how to keep both in balance.

What’s in this article?

• What are working capital and cash flow, and how do you calculate them?
  
• Why is working capital important for cash flow?
  
• How does working capital management improve cash flow?
  
• Does increasing working capital reduce cash flow?
  
• How should you balance working capital and cash flow?
  

What are working capital and cash flow, and how do you calculate them?

Working capital and cash flow speak to how financially healthy your business is, but they look at it from different angles. Working capital shows what you have available to cover short-term obligations. Cash flow tracks the movement of cash in and out of your business over time.

Working capital

Working capital is a measure of liquidity. This metric tells you whether you can pay your upcoming bills. Cash is included in working capital, but it also includes inventory, accounts receivable (AR), and other assets.

Formula

Working Capital = Current Assets – Current Liabilities

• Current assets include cash, AR, inventory, and other assets you expect to convert to cash within 12 months.
  
• Current liabilities include all obligations due in the next year, such as accounts payable (AP), short-term debt, and taxes payable.
  

For example, if your business has $600,000 in current assets and $400,000 in current liabilities, your working capital is $200,000. That means after paying your short-term bills, you’ll have $200,000 left in liquid resources.

Working capital isn’t directly listed on your financial statements. You calculate it using figures from the balance sheet. Some financial models rely on “operating working capital,” which strips out cash and nonoperational assets, but the standard formula includes all current assets.

Cash flow

Cash flow measures movement. The metric tells you whether more money is entering or exiting your business during a given period (e.g., a month, a quarter). It focuses on timing and shows only what entered or left your bank account during the specified period.

Formula

Cash Flow = Total Inflows – Total Outflows

• Total inflows include all cash received in that period, such as customer payments, interest income, or grants.
  
• Total outflows include all cash paid out in that period, such as salaries, rent, supplier payments, loan repayments, and taxes.
  

What’s left is your net cash flow. If you brought in more than you spent, you’re cash flow positive. If more money went out than came in, you’re in a cash flow deficit for the period.

A cash flow statement splits activity into subsections, including:

• Operating cash flow: Cash in/out related to your core business activities
  
• Investing cash flow: Cash in/out from capital expenditures, investment returns, or any other investment activity
  
• Financing cash flow: Cash in/out from debt and equity
  

Working capital offers a static view, while cash flow gives you a dynamic view. A business might show solid working capital because it has a lot of receivables, but cash flow could be tight because of slow customer payments or poor inventory turnover. Conversely, you might have strong cash flow but dangerously low working capital if a large bill is due tomorrow.

Why is working capital important for cash flow?

Working capital matters for cash flow because it’s the buffer that keeps you from running out of money while you wait for more to come in.

Even if your business is profitable, cash doesn’t always move on the same timeline as your earnings. Customers might take 30, 60, or 90 days to pay. Inventory sits before it sells; meanwhile, rent, payroll, taxes, and suppliers won’t wait. Working capital is what fills that timing gap.

For example:

• Your business sells $100,000 worth of goods.
  
• Customers pay you 60 days later.
  
• Suppliers expect payment in 30 days.
  

Unless you have cash or other short-term assets available (i.e., working capital), you’ll be in a crunch by day 30 despite a strong sales month. Working capital lets you cover short-term expenses without relying on emergency funding.

Working capital is especially important when unexpected changes occur, such as:

• Delayed payments
  
• Slowed sales
  
• Supply chain disruptions
  
• Shifts in demand
  

Strong working capital keeps your bills paid even when surprises hit. That keeps vendors happy, lines of credit open, and operations steady, all of which protect your ability to generate cash.

Monitoring your working capital also helps flag early warning signs that too much cash is getting tied up. Spikes in AR, growing inventory, or shrinking payables can signal trouble before it’s reflected in your cash account. Without close management, a business might appear liquid on paper but still miss payroll.

How does working capital management improve cash flow?

Managing working capital means steering how much cash your business has access to day to day. How you handle receivables, inventory, and payables has a direct effect on how much cash is available. When you manage working capital well, you have more flexibility, fewer surprises, and less need for outside funding. Here’s how to boost your working capital and maintain steady access to cash.

Accelerate accounts receivable

The faster you turn invoices into cash, the better your cash flow. That might mean:

• Invoicing as soon as work is complete
  
• Tightening your payment terms, or offering early payment incentives
  
• Systematically following up on overdue accounts
  
• Using tools such as automated reminders or invoice financing when appropriate
  

Every day you shave off your collection period is a day sooner that cash hits your account.

Tighten inventory

Inventory ties up capital until it’s sold. You want enough on hand to meet demand but not so much that products sit idle on your shelves.

Improving inventory management might involve:

• Fine-tuning your demand forecasting
  
• Rotating or liquidating slow-moving items
  
• Implementing just-in-time restocking with suppliers
  
• Reducing backup stock where feasible
  

Faster inventory turnover puts cash back in play.

Manage payables with intention

Delaying outflows (without damaging vendor relationships) is another way to preserve liquidity. Doing that means using your full payment terms strategically:

• Don’t pay invoices early unless there’s a clear financial benefit (such as an early payment discount).
  
• Use tools such as payables automation to schedule payments more precisely.
  
• Use credit for payables if the cost-benefit math checks out.
  

The goal is to align outflows with inflows to avoid prematurely depleting your cash.

Maintain a rightsized cash reserve

Having too little cash on hand puts you at risk of disrupting operations, while too much means you’re not putting your money to work. The right buffer protects you from short-term shocks without dragging down your return on capital. And it reduces your need for emergency financing, which can carry high fees or unfavorable terms.

Use tools that speed up money movement

Efficient payments infrastructure matters. For example, if you accept payments through Stripe, you can get paid quickly, track receivables and settlements easily, and reduce manual follow-ups. Faster inflows mean stronger cash flow.

The more real-time visibility and control you have, the more precisely you can manage working capital to support liquidity.

Does increasing working capital reduce cash flow?

Sometimes, increasing working capital negatively affects your cash flow. When your working capital increases, it can mean cash is being used somewhere—whether it’s tied up in receivables, inventory, or paying off short-term liabilities. That can slow down your available cash, even if your assets look stronger on paper.

When working capital goes up, it means your current assets increased, your current liabilities decreased (e.g., you paid off short-term debt), or both. Unless your current assets increased because of a rise in actual cash, all three scenarios involve cash going out the door.

For example:

• If you sell more on credit, AR goes up—but the cash hasn’t arrived yet.
  
• If you stock up on inventory ahead of a busy season, that’s more money tied up in goods not yet sold.
  
• If you pay off vendor invoices faster, you have fewer liabilities, but cash is also flowing out more quickly.
  

Not every increase in working capital pulls on cash. It depends on what’s changing and how it’s funded. If a customer pays you and you hold that cash, current assets increase, and your liabilities don’t change. In that case, your working capital increases, and so does cash flow. Working capital growing because you’re building up receivables or inventory is a short-term cash drag, but working capital growing because your cash balance increased is positive for cash flow, too.

This is especially important when your business is scaling. Growth usually requires more working capital: more inventory to meet demand, more receivables as sales grow. So even if revenue is climbing, your cash flow might feel squeezed—you’re investing ahead of the curve and waiting for that money to cycle back.

It’s not necessarily a problem, but you need to plan. Fast growth without enough cash flow can create strain, particularly if you don’t have financing lined up to cover the gap. Financing tools such as Stripe Capital can help you cover expenses if cash flow temporarily dips as you grow so you don’t miss expansion opportunities because of a lack of available cash.

How should you balance working capital and cash flow?

The goal is for working capital and cash flow to work in sync. Strong cash flow without enough working capital leaves you exposed to short-term shocks. But excess working capital—cash sitting idle, inventory piling up—can weigh you down. You want a fluid system in which cash moves steadily and working capital is lean but resilient. Here’s how to strike that balance:

Keep working capital positive but efficient

You want your current assets to exceed current liabilities—but not by so much that capital sits unused. For example:

• Too much inventory means cash is frozen in unsold goods.
  
• Bloated receivables will delay cash inflow.
  
• An overstuffed bank account can be an opportunity cost.
  

However, if your working capital drops too low, a single delayed payment or surprise expense could create a crisis. It’s all about balance.

Make sure your cash flow remains positive

Your operations need to regularly bring in more cash than you spend. When that’s the case, it means:

• Your business model is working
  
• You’re not overreliant on debt or investor capital
  
• You have room to reinvest, grow, or weather a downturn
  

But timing matters. If inflows and outflows are lopsided (e.g., big vendor invoices are due before customer payments), you’ll need enough working capital to cover that shortfall.

Use working capital to strategically support growth

You might need to invest to support expansion. That’s fine as long as:

• You have a plan for turning that investment back into cash
  
• The cash conversion cycle is short enough to avoid a squeeze
  
• You’re not growing so fast that operations can’t keep up
  

In those cases, it might make sense to increase working capital temporarily knowing that the return is coming soon. Just make sure your cash position can handle the lag.

Monitor metrics and patterns

You need visibility into how your business is doing. Useful ratios and signals include:

• Current ratio: This shows your ability to meet your short-term obligations as a proportion rather than a dollar amount. A current ratio of 1.5 to 2 is typically considered healthy, but context is important.
  
• Cash conversion cycle: This shows how long it takes to turn your investments into cash—the shorter the cycle, the better.
  
• Trends in receivables and payables: These can show widening gaps that signal future cash tension.
  

Use financing when it makes sense

Short-term loans or lines of credit can help make up for seasonal dips or fund big purchases. But don’t rely on financing to cover a fundamentally broken cycle. If you’re consistently low on cash, the fix needs to come from inside the business (e.g., faster collections, better inventory control, or more thoughtful payment timing), not outside capital.

Put excess cash flow to work

If you’re consistently generating more cash than you need to support operations, that’s a good problem to have—but it’s still a misstep if you don’t put any of that cash to work. Consider using it to:

• Invest in new growth (e.g., research and development [R&D], marketing, entering new markets)
  
• Reduce liabilities (e.g., paying off debt)
  
• Fund short-term investments (e.g., money market funds, short-duration bonds)
  

Too much cash sitting idle slows your return on capital—don’t hoard it.