IB Business Management Practice Exam 2025 - Free IB Business Management Practice Questions and Study Guide

Working capital is a crucial financial metric that represents the difference between a business's current assets and its current liabilities. This term is significant because it indicates the liquidity position of a company, reflecting its ability to cover short-term obligations with its short-term assets. When current assets are financed not by current liabilities, it suggests that the business has enough operational efficiency and financial stability to fund its activities without relying heavily on short-term debt.

In practical terms, working capital is calculated by subtracting current liabilities from current assets, providing insight into the financial health of a business. A positive working capital indicates that a company can readily purchase inventory, pay employees, and cover other operational expenses, fostering a greater opportunity for growth and operational flexibility.

The other options relate to different financial aspects: equity represents ownership interest in the company, current assets pertain to assets that are expected to be converted to cash within a year, and liquidity ratio measures a company's ability to meet its short-term obligations. Understanding working capital is essential for analyzing a company's operational efficiency and financial strategy.