What does working capital represent for a business?

Working capital is a vital financial metric representing the difference between a company's current assets and current liabilities. This measurement provides insight into the short-term liquidity position of a business, reflecting its ability to cover its short-term obligations with its short-term assets.

Current assets include cash, inventory, and accounts receivable, which are expected to be converted into cash or utilized within one year. Current liabilities consist of obligations such as accounts payable, short-term debt, and other upcoming expenses that must be settled within the same timeframe. A positive working capital indicates that the company can easily manage its short-term debts, while negative working capital may suggest financial trouble or liquidity issues.

In contrast, the other options represent different financial concepts that do not define working capital. Total revenue pertains to the overall sales generated by the company, cash reserves specifically indicate liquid funds available at a given moment, and net profit refers to the earnings after all expenses have been deducted. Each of these is important for assessing a company's overall health but does not align with the specific function and definition of working capital.