Gross working capital refers to the total current assets of a company. The current assets of a company are those assets which can be converted into cash within a period of 12 months. They comprise cash in hand and bank balances, accounts receivable, inventory, short-term investments, marketable securities, etc.
It is not possible to determine the liquidity position of a company with only the gross working capital. The current liabilities of the company, such as the accounts payable, short-term loans, and other outstanding loans will also be required to calculate the net working capital, which is a determinant of the company’s liquidity.
How is Gross and Net Working Capital Calculated?
*Gross working capital = Total current assets of the company
Net working capital = Total current assets - Total current liabilities*
Current assets include current investments, inventory, trade receivables, cash and cash equivalents, short-term loans and advances, and other current assets. Current liabilities include short-term borrowings, trade payables, other current liabilities, and short-term provisions.
Positive working capital is when current assets are greater than current liabilities, and means that the company has sufficient funds for operations and growth. Negative working capital is when current liabilities exceed current assets and could indicate financial distress for the company, as it may not be able to pay off its creditors.
Gross Working Capital vs Net Working Capital
Gross working capital is the sum total of all the current assets of a company, whereas net working capital is the difference between the current assets and the current liabilities of a company.
Gross working capital is not an indicator of a company’s liquidity position as it takes into consideration those assets which can be converted into cash within a year. Net working capital gives the true picture of a company’s operating liquidity, as it also takes into consideration the financial obligations of the business.