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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
This article discussed in detail what gross working capital is and how it helps an organisation to identify its immediate future actions. Hopefully, the difference between gross and net working capital will be able to clear any doubt regarding either of those.

FAQs About Gross Working Capital

What is a balance sheet?

A balance sheet is a financial statement that shows details regarding the company’s assets and liabilities for a specific period of time. It is one of the primary financial statements used to evaluate a company’s performance.

What is a working capital ratio?

The working capital ratio is the ratio between a company's current assets and liabilities. This is a piece of very useful information to assess a company's liquidity and efficiency.

What is negative working capital?

A negative working capital situation arises when the current liabilities exceed a company’s current assets. This either indicates that the company is not performing well or it is not managing its cash flow efficiently.