Define working capital. Why is it important?

Working capital is the difference between a company’s current assets and current liabilities. It represents the short-term liquidity available to a business for daily operations. Current assets include cash, accounts receivable, and inventory, while current liabilities cover debts and obligations due within a year, such as accounts payable and short-term loans. Working capital is important because it ensures that a company can meet its short-term obligations and continue operating without disruption. Positive working capital means a company has enough assets to cover its liabilities, while negative working capital can signal financial trouble. Efficient working capital management supports smooth operations, improves cash flow, and strengthens financial stability. It also impacts the company’s ability to invest, grow, and respond to unexpected expenses. Maintaining an optimal level of working capital is vital for sustaining profitability and minimizing financial risk in day-to-day business functions.