What does "working capital" refer to?

Working capital is a key financial metric that represents the short-term liquidity of a business, which is essential for its day-to-day operations. Specifically, it refers to the difference between current assets and current liabilities. Current assets are those that are expected to be converted into cash within a year, such as inventory and accounts receivable, while current liabilities are obligations that are due within the same timeframe, like accounts payable and short-term loans.

By calculating working capital, a business can assess its ability to cover short-term financial obligations. Positive working capital indicates that a company has enough assets to meet its current liabilities, which is crucial for smooth operations and maintaining supplier relationships.

The other options do not accurately convey the definition of working capital. For instance, total revenue generated does not account for liabilities, and focusing solely on cash on hand ignores other liquid assets. Additionally, investment in fixed assets pertains to long-term investments and does not relate to the short-term financial health that working capital assesses. Thus, understanding working capital is vital for managing small business finances effectively.