Definition:
Working capital refers to the amount of money that a company has available for its day-to-day operations. It represents the difference between a company's current assets and current liabilities.

Explanation:
Working capital is a crucial financial metric that helps businesses determine their short-term liquidity. It is essential for a company to have sufficient working capital to meet its current obligations and maintain smooth operations.

Components of Working Capital:
Working capital is calculated by subtracting current liabilities from current assets. Current assets are those assets that are expected to be converted into cash within one year, while current liabilities are the debts and obligations that are due within one year.

The components of working capital include:

1. Raw Materials: These are the basic materials needed to produce the final product. Raw materials are an essential component of working capital as they are converted into finished goods and sold to generate revenue.

2. Money in Hand: This refers to the cash and cash equivalents that a company has on hand. Cash is vital for meeting day-to-day expenses such as salaries, utility bills, and inventory purchases.

Importance of Working Capital:
Working capital is crucial for the smooth functioning of a business. It helps in:

1. Managing Cash Flow: Adequate working capital ensures that a company has enough funds to cover its short-term expenses and obligations. It prevents the company from facing a liquidity crunch and helps in maintaining a positive cash flow.

2. Meeting Operational Expenses: Working capital enables a company to meet its day-to-day operational expenses, such as rent, wages, and utility bills. It ensures that the business can continue its operations without interruption.

3. Expanding Operations: Sufficient working capital provides a company with the financial resources to invest in new projects, purchase additional inventory, and expand its operations. It helps in driving growth and seizing business opportunities.

4. Dealing with Unexpected Events: Having a healthy working capital position allows a company to handle unforeseen events such as economic downturns, supply chain disruptions, or unexpected increases in expenses. It provides a cushion to absorb the impact of such events.

In conclusion, working capital primarily comprises raw materials and money in hand. It is a crucial financial metric that helps businesses manage their day-to-day operations, meet short-term obligations, and maintain liquidity. Adequate working capital is vital for the smooth functioning and growth of a company.