ACA Financial Management Practice Exam 2025 - Free Financial Management Practice Questions and Study Guide

Working capital represents a crucial financial metric that reflects a company's short-term liquidity and operational efficiency. It is calculated as the difference between a company's current assets and current liabilities.

Current assets include items that are expected to be converted to cash or used up within one year, such as cash, accounts receivable, and inventory. Current liabilities refer to obligations that a company needs to settle within the same timeframe, including accounts payable, short-term loans, and other accrued expenses.

By assessing working capital, stakeholders can gauge a company’s ability to meet its short-term obligations while also evaluating its capacity to finance its day-to-day operations. A positive working capital indicates that a company has enough short-term assets to cover its short-term liabilities, which is vital for operational stability. Conversely, negative working capital can signal potential liquidity issues that may impede a company's ability to operate effectively.

This understanding is essential for financial management practices as it helps in making informed decisions regarding cash flow management, funding strategies, and assessing overall financial health.