In working capital management, risk is measured by the probability that a firm will become
A) unable to meet long-term obligations.
B) liquid.
C) less profitable.
D) technically insolvent.

Question

Quizplus · Accepted Answer

In working capital management, risk is typically measured by the probability that a firm will become technically insolvent, meaning that it will be unable to meet its short-term financial obligations. This is because working capital management focuses on the management of a company's short-term assets and liabilities, such as inventory, accounts receivable, and accounts payable. If a company is unable to pay its short-term debts, it may be forced to file for bankruptcy, which can have serious long-term consequences for the company's profitability and future viability. Therefore, managing working capital effectively and minimizing the risk of technical insolvency is a key component of overall financial management for most businesses.

In Working Capital Management, Risk Is Measured by the Probability