What does working capital refer to in business terms?

Working capital is a critical financial metric in business that indicates a company's short-term financial health and operational efficiency. It is calculated as the difference between current assets and current liabilities. Current assets include cash, inventory, accounts receivable, and other assets expected to be converted into cash within a year. Conversely, current liabilities entail obligations that need to be settled within the same timeframe, such as accounts payable and short-term debt.

The significance of working capital lies in its ability to measure a company's liquidity and operational capability to cover immediate expenses and obligations. A positive working capital indicates that a business has more current assets than current liabilities, implying that it can easily fund day-to-day operations and invest in growth opportunities. In contrast, negative working capital may suggest financial difficulties and potential liquidity issues, making it challenging for the business to meet its short-term obligations.

Other options encompass broader financial concepts that do not specifically define working capital. Total revenue relates to a company’s total income from sales and services, which does not directly reflect its ability to manage short-term liabilities. Cash on hand denotes available liquid resources but does not capture the overall financial position in relation to liabilities. Total profit indicates earnings over a period but does not illustrate short-term financial health. Thus, the definition of working