What is working capital?

Working capital is defined as the difference between current assets and current liabilities. This financial metric is crucial for assessing a company’s short-term financial health and its ability to cover immediate obligations. Current assets include cash, inventory, accounts receivable, and other assets that are expected to be converted into cash within a year. Current liabilities encompass debts or obligations that are due within the same time frame, such as accounts payable and short-term loans.

Having sufficient working capital means that a business can efficiently manage its operations and meet its financial commitments without facing liquidity issues. This metric is often used by financial analysts to gauge the operational efficiency and short-term financial viability of a business.

The other options do not accurately capture the definition of working capital. The total value of all business assets refers to the overall worth of the company without focusing on liquidity aspects. Long-term debt obligations pertains to the company’s future financial liabilities, which are not part of the working capital calculation. Total equity invested by owners indicates the ownership stake but does not relate directly to the day-to-day financial management that working capital addresses.