Working capital refers to a company's liquid funds and assets that can be converted to cash within one year. It includes current assets like cash as well as inventory and accounts receivable, minus current liabilities. Maintaining adequate working capital is important for businesses to pay expenses, obtain materials, build inventory, grant credit to customers, and take discounts. Both insufficient and excessive working capital can negatively impact a business's operations, cash flow, production, and profitability. Proper management of working capital is necessary for business success.