How is working capital defined?

Working capital is defined as the difference between current assets and current liabilities. This metric is crucial for understanding the financial health and operational efficiency of a business. It indicates the short-term liquidity available to meet ongoing operational expenses and is vital for a company’s day-to-day functioning.

Current assets typically include cash, inventory, and accounts receivable, while current liabilities encompass accounts payable, short-term loans, and other obligations due within a year. A positive working capital figure means that a business can easily cover its short-term liabilities with its current assets, suggesting good financial health. Conversely, negative working capital may indicate financial trouble or inefficiencies in managing assets and liabilities.

The other options provided do not accurately represent the concept of working capital. Total revenue relates to a business's income rather than its liquid assets and obligations. The amount of cash held at any time reflects only one component of current assets but does not provide a complete picture of working capital. Total equity represents the ownership interest in the firm and accounts for liabilities, but it is not a measure of liquidity or capability to cover short-term obligations.