Working capital management is the process of monitoring and optimizing a company’s short-term assets and liabilities to ensure it can meet its operational needs and financial obligations. It focuses on maintaining a balance between current assets, such as cash and receivables, and current liabilities, such as accounts payable and short-term debt.
Why is working capital management important for startups?
Working capital management is crucial for startups because it ensures they have enough liquidity to cover short-term expenses, such as payroll, rent, and supplier payments. Proper management helps prevent cash flow problems, reduces dependency on external financing, and enables startups to allocate resources efficiently for growth opportunities.
What risks arise from poor working capital management?
Poor working capital management can lead to cash flow shortages, missed payments, and operational disruptions. It may also result in higher borrowing costs, damaged relationships with suppliers, and reduced ability to seize growth opportunities. Startups with inadequate working capital management risk financial instability and potential business failure.
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