Define working capital and its importance for startups.

Define working capital and its importance for startups.

• A. Current assets minus current liabilities; signals short-term liquidity.
• B. Total assets minus total liabilities; signals overall solvency.
• C. Net income minus depreciation; indicates profitability.
• D. Cash on hand minus debt due this year; signals immediate cash availability.

Answer: (D)

Liquidity is about having enough cash to cover near-term obligations. While a common way to think about working capital is current assets minus current liabilities, which shows general short-term liquidity, startups care most about immediate cash runway—how much cash they have on hand to meet near-term needs. This description—cash on hand minus debt due this year—best signals how much cash is directly available to keep the business running in the next few months. For a startup, that near-term cash cushion determines whether they can pay payroll, suppliers, and other essential expenses without scrambling for new funding. The other ideas describe broader concepts: total assets minus total liabilities looks at overall solvency, not immediate cash; net income minus depreciation relates to profitability, not cash flow. So focusing on immediate cash available to meet near-term obligations is the most relevant signal for startup survival and continuity.

Liquidity is about having enough cash to cover near-term obligations. While a common way to think about working capital is current assets minus current liabilities, which shows general short-term liquidity, startups care most about immediate cash runway—how much cash they have on hand to meet near-term needs.

This description—cash on hand minus debt due this year—best signals how much cash is directly available to keep the business running in the next few months. For a startup, that near-term cash cushion determines whether they can pay payroll, suppliers, and other essential expenses without scrambling for new funding.

The other ideas describe broader concepts: total assets minus total liabilities looks at overall solvency, not immediate cash; net income minus depreciation relates to profitability, not cash flow. So focusing on immediate cash available to meet near-term obligations is the most relevant signal for startup survival and continuity.