What Is the Meaning of Gross Working Capital?
As the name suggests, working capital is an organisation's fund to keep it operational or working. Every organisation has their working capital, which varies depending on the size of the organisation. This capital is segmented into two parts – gross and net working capital.
This article will discuss how to calculate gross working capital with an example.
What is Gross Working Capital?
Gross working capital is the valuation of the company's current assets, which can be converted into cash within short notice. Such assets include liquid cash, short-term investments, account receivables, marketable securities, inventory, etc. However, gross capital is not enough to determine an organisation’s liquidity as it doesn't consider liabilities.
How to Calculate Gross Working Capital?
Gross working capital is a simple concept. It is basically the value of the short-term assets of the company along with its cash assets. Hence, the formula is going to be something like this:
Gross WC = Total CA
Here,
WC means Working Capital
CA mean Current Asset
Total CA = short-term investment + inventory + receivable + marketable security + cash + any other CA
Let’s understand this concept of gross working capital with the help of an example.
Suppose XYZ is an organisation. And here is the updated balanced sheet of the company.
XYZ Private Limited |
|||
Assets |
Amount |
Liabilities and Shares |
Amount |
Cash and equivalent Accounts receivable Inventory Short-term investment |
1,00,000 50,000 10,000 20,000 |
Accounts payable Accrued expense Deferred revenue Short-term borrowing |
20,000 8,000 5,000 17,000 |
Total Current Assets |
1,80,000 |
Total Current Liabilities |
50,000 |
As you can see, the current asset value of the company is ₹ 1,80,000 which is equal to the gross working capital. But that only represents half of the picture. If we minus the total current liabilities from the total current assets, which is the net working capital of the company, it will be ₹ 1,30,000. Considering this, the company seems to have good financial health.
Significance of Gross Working Capital
The gross working capital does not talk about a company’s optimum financial ability; hence it might not give a whole idea of how it is doing overall. But it certainly tells you about its immediate financial capabilities. Also, it gives you an insight into the cash flow of the business.
It helps investors make decisions about investing in a certain company, given how it has been performing. Additionally, you can calculate the working capital ratio, which is a more substantial way of determining a company's financial health.
Difference Between Gross Working Capital and Net Working Capital
Here are some basic differences between gross and net working capital to grasp the concept of each more clearly.
|
Parameter |
Gross Working Capital |
Net Working Capital |
|
Nature |
Quantitative in nature |
Qualitative in nature |
|
Depict Finances |
Cannot reflect the actual financial health of the company |
Helps in finding out the actual financial health of the company |
|
Purpose |
Helpful in financial management |
Helpful in accounting |
|
Result |
Only shows the total fund available to finance current assets |
Shows the company’s ability to meet its operating expenses and current liabilities |
