How does positive working capital impact liquidity?

Positive working capital significantly impacts liquidity by indicating a company's ability to cover short-term liabilities with its short-term assets. When a firm has positive working capital, it means that its current assets—such as cash, accounts receivable, and inventories—exceed its current liabilities, which include obligations like accounts payable and short-term debt. This balance is crucial for maintaining operational stability, as it ensures that the company can meet its immediate financial obligations without having to liquidate long-term assets or incur additional debt.

The presence of positive working capital acts as a buffer, allowing a business to manage unexpected expenses or fluctuations in cash flow. It provides a healthy financial foundation, reflecting operational efficiency and effective resource management. This relationship between working capital and liquidity is essential for businesses to thrive, especially in times of financial uncertainty or when pursuing growth opportunities.

In contrast, other options suggest limitations or misconceptions about working capital. For instance, the notion that it limits the ability to invest in growth overlooks the fact that sufficient working capital provides the resources necessary for companies to explore and fund new opportunities. Increased long-term debt obligations do not relate directly to working capital as the focus is primarily on short-term solvency, while claims that working capital has no relationship to liquidity ignore the fundamental nature of financial