Working capital is a financial metric that measures a company’s short-term liquidity and operational efficiency. It is calculated as the difference between current assets (such as cash, accounts receivable, and inventory) and current liabilities (such as accounts payable and short-term debt). Positive working capital indicates that a company can meet its short-term obligations, while negative working capital may signal financial challenges.
Why is working capital important for startups?
Working capital is essential for startups to ensure they have enough resources to cover their short-term expenses, such as salaries, rent, and supplier payments. Proper management of working capital allows startups to avoid cash flow issues, invest in growth opportunities, and build financial stability.
What are the key components of working capital?
- Current Assets: Cash, accounts receivable, inventory, and other short-term resources. - Current Liabilities: Accounts payable, short-term loans, and other immediate obligations. The balance between these components determines a company’s liquidity position.
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