How is 'working capital' defined?

Working capital is defined as the difference between current assets and current liabilities. This metric is crucial for assessing a company's short-term financial health and operational efficiency. Current assets include cash, accounts receivable, inventory, and other assets that are expected to be converted into cash within one year. Current liabilities, on the other hand, are obligations that the company needs to settle within the same timeframe, such as accounts payable and short-term debt.

By calculating working capital, businesses can gauge their ability to cover short-term obligations and ensure that they have sufficient funds to support ongoing operations. A positive working capital indicates that a company can meet its short-term liabilities with its current assets, whereas a negative working capital situation might signal potential financial difficulties.

The other options do not accurately represent the concept of working capital. For example, total cash availability pertains to liquidity but does not encompass other current assets or liabilities. The sum of equity and liabilities refers to the overall financing of the firm and does not specifically address short-term solvency or operational liquidity. Lastly, total assets represent everything owned by the company, which includes both current and long-term assets, thus failing to focus specifically on the short-term liquidity aspect captured by working capital.