What is the term for a firm's ability to meet its commitments for financial liabilities?

The term that refers to a firm's ability to meet its commitments for financial liabilities is known as working capital. Working capital is calculated by subtracting current liabilities from current assets and reflects the short-term financial health of a business. It indicates whether a company has enough short-term assets to cover its short-term debts. A positive working capital means that the firm can meet its obligations, which is essential for maintaining operations and ensuring financial stability.

Having adequate working capital is crucial because it allows businesses to manage their day-to-day operations effectively, pay bills, invest in growth opportunities, and remain solvent in the face of economic fluctuations. It acts as a buffer against financial difficulties and enables a company to navigate through periods of reduced cash flow.

While gross revenue reflects the total income generated from sales before any expenses, it does not provide insight into a company’s ability to meet its financial obligations. Net worth, on the other hand, refers to the difference between total assets and total liabilities, which is more about the overall value of a business rather than its immediate liquidity. Cash flow represents the movement of money into and out of a business, which is important but does not directly measure the ability to meet current obligations as working capital does.