What is working capital, and why is it important for operations?

• A. Working capital = current assets minus current liabilities; signals short-term liquidity and operations flexibility.
• B. Working capital equals total assets minus total liabilities.
• C. Working capital equals cash plus inventory.
• D. Working capital is the difference between revenue and expenses.

Answer: (A)

Working capital is current assets minus current liabilities. This measures a company’s ability to cover its short-term obligations using assets that are expected to be converted to cash within a year, which in turn signals liquidity and operational flexibility. Having positive working capital means there’s enough cash, receivables, and inventory to pay suppliers, payroll, and other day-to-day costs, and to handle unexpected expenses or opportunities without needing urgent external financing. If working capital is negative, the business may struggle to meet obligations and could face pressure to borrow or liquidate assets.

The other options don’t fit because they describe different concepts: total assets minus total liabilities equals owners’ equity, not available liquidity for daily operations; cash plus inventory is only part of current assets and ignores current liabilities; revenue minus expenses is net income, not the buffer available for operations.