What does working capital represent in a business?

Working capital represents the difference between current assets and current liabilities. This metric is crucial for assessing a company's short-term financial health and operational efficiency. It indicates the funds available to a business for day-to-day operations, ensuring that it can meet its short-term obligations. A positive working capital indicates that a company can cover its current liabilities with its current assets, which is vital for maintaining liquidity and ensuring smooth business operations.

The concept of working capital is fundamental in financial analysis as it provides insight into the operational efficiency and short-term financial stability of a company. If a company's current assets significantly exceed its current liabilities, it suggests that the business is in a strong position to manage its operating expenses and invest in growth opportunities. On the other hand, negative working capital might indicate potential liquidity issues, signaling that a business may struggle to meet its short-term liabilities.