How is working capital primarily affected?

Working capital is defined as the difference between current assets and current liabilities, and it is crucial for a business's short-term financial health and operational efficiency. Managing current assets, such as inventory, accounts receivable, and cash, alongside current liabilities, which include accounts payable and short-term debt, directly impacts working capital.

When a company efficiently manages these components, it can optimize cash flow and ensure that it has sufficient resources to meet its short-term obligations. For example, by reducing the amount of inventory held or speeding up collections on accounts receivable, a business can increase its current assets, thereby improving its working capital. Conversely, if current liabilities are increased through additional short-term borrowing or delayed payments to suppliers, working capital can be adversely affected.

Thus, the primary factor that influences working capital is the management of current assets and liabilities, allowing firms to maintain liquidity and operational capability. This focus on current items makes the correct choice clear, as long-term assets and fixed asset values do not directly impact working capital calculations in the same manner.