What aspect of working capital can strain operations?

Tight working capital refers to a situation where a business has insufficient current assets to cover its current liabilities, which can put significant strain on operations. When working capital is tight, it can lead to cash flow issues, making it difficult for a company to meet its short-term obligations, such as paying suppliers or employees. This can result in delays, lost opportunities, and ultimately affect the business's ability to grow and maintain a competitive edge in the market.

In addition, tight working capital might lead to a reliance on credit or loans, which can incur additional costs and interest, further stressing the financial health of the company. Managing working capital effectively is crucial for maintaining liquidity and operational efficiency. Companies facing tight working capital often struggle to invest in growth opportunities or may be unable to respond quickly to changing market conditions, potentially jeopardizing their long-term sustainability.

Other options, such as excess liquidity, strong financial controls, and effective cost management, typically contribute positively to a company’s financial health and operational efficiency. Excess liquidity can provide a safety net and enable investment in growth. Strong financial controls help ensure that resources are used effectively and efficiently, while effective cost management keeps expenses in check, typically supporting better working capital management.