How is working capital defined?

Working capital is defined as the difference between current assets and current liabilities. This metric is crucial for assessing a company's liquidity and operational efficiency. Current assets typically include cash, accounts receivable, and inventory, which can be expected to be converted into cash or used up within a year. On the other hand, current liabilities consist of obligations such as accounts payable and short-term debts that are due within the same timeframe.

Understanding working capital is vital for businesses as it indicates the short-term financial health of the company. A positive working capital suggests that a company has sufficient assets to cover its short-term liabilities, which is essential for maintaining day-to-day operations. It provides insights into how effectively a business can manage its finances and invest in growth opportunities.

Other options do not accurately represent the concept of working capital. Total cash available in a business focuses narrowly on liquidity without considering other assets or obligations. The value of inventory indicates only one component of current assets, and assessing total liabilities overlooks the necessary distinction between current and non-current liabilities that are vital for determining working capital.