In financial management, what does the concept of 'working capital' represent?

The concept of 'working capital' in financial management specifically refers to the difference between current assets and current liabilities. This measure is crucial for evaluating a company's short-term financial health and operational efficiency.

Current assets include cash, accounts receivable, and inventory — assets that are expected to be converted into cash or used up within a year. Current liabilities are obligations that a company needs to settle within the same time frame, such as accounts payable and short-term loans.

By calculating working capital, businesses can determine if they have enough short-term assets to cover their short-term liabilities. A positive working capital indicates that a company can fund its day-to-day operations and invest in growth opportunities, while a negative working capital might suggest financial trouble and potential liquidity issues. Thus, understanding working capital is essential for effective financial management, as it directly impacts operational capabilities and overall financial stability.