What is the definition of working capital?

Working capital is defined as the difference between current assets and current liabilities. This measure is crucial for assessing a company's short-term financial health and its ability to cover its day-to-day operations.

Current assets include items such as cash, accounts receivable, and inventory that are expected to be converted into cash or used up within a year. Current liabilities, on the other hand, consist of obligations that the business must pay within the same time frame, like accounts payable and short-term debts. By calculating working capital, businesses can determine whether they have enough short-term assets to manage their short-term liabilities. A positive working capital indicates that the company is in a good position to meet its immediate financial obligations, while a negative working capital could signal potential liquidity issues.

In the context of the other options, total assets and total liabilities do not specifically reflect the company's operational liquidity in the same way that working capital does. Cash reserves refer only to the liquid cash available and do not encompass all current assets or liabilities. Understanding working capital provides a more comprehensive view of a business's operational efficiency and financial stability.