What is the definition of working capital?

Working capital is defined as the difference between a company's current assets and current liabilities. This measure is essential for identifying the short-term financial health of a business, as it indicates whether a company has enough assets to cover its short-term liabilities.

Current assets typically include cash, accounts receivable, and inventory, which are expected to be converted into cash or used within a year. Current liabilities are obligations that the company needs to settle within the same time frame, such as accounts payable and short-term debt. A positive working capital suggests that a company can easily pay off its short-term obligations, which supports its operational efficiency and financial stability.

In contrast, the other options do not correctly define working capital. Total assets represent the entire asset base of a company without focusing on liquidity needs. The sum of a company's revenues does not provide insight into its operational liquidity. Finally, the amount of cash on hand is a component of current assets but fails to encompass the entire working capital formula.