Canadian Accredited Insurance Broker (CAIB) Three Practice Exam

What does the term "working capital" refer to in a contractor's financial assessment?

1. The total value of assets

2. The amount available to fund a new project

3. The amount of cash on hand

4. The total liability of debts

The correct answer is: The amount available to fund a new project

The term "working capital" in a contractor's financial assessment specifically refers to the amount available to fund day-to-day operations and ongoing projects. It is calculated as current assets minus current liabilities. This measure is crucial for contractors as it indicates their short-term liquidity and operational efficiency, allowing them to maintain cash flow, pay suppliers, and meet other financial obligations as they arise. In the context of contractor financial assessments, having sufficient working capital ensures that a contractor can absorb the costs of materials, labor, and other expenses associated with ongoing projects without financial strain. This flexibility is essential when taking on new projects, as it directly affects their ability to bid and manage those projects effectively. While total assets, cash on hand, and total liabilities are important components of a contractor's financial picture, they do not accurately capture the liquidity needed to sustain operations on an ongoing basis. Working capital provides a focused snapshot of how well a contractor is positioned to handle immediate financial responsibilities while pursuing new opportunities.