Know about the Finance and Investments Terms

There are two concepts of working capital – gross working capital and net working capital. Since companies must have adequate working capital to run and grow their operational functions, they must understand the nature of these different types of working capitals.

Gross Working Capital

Gross working capital is a company’s total amount of current assets, including cash on hand, inventory, accounts receivable and short-term investments. However, liabilities are not part of this calculation; hence gross working capital shows a limited description of a company’s finance. 

Gross Working Capital = Total Current Assets

Net Working Capital

A net working capital is a complete and accurate measure of a company’s liquidity health.  It represents a company’s excess of current assets over its current liabilities. The current assets comprise bank balance, cash, debtors, stock, bills receivables, etc. On the other hand, the current liabilities include things like creditors, bills payables, etc. 

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There are many people who have no idea how they could influence working capital finance in favor of their business. If the same is true even in your case, here are some simple methods that can help you satisfy your basic business needs with the help of working capital finance.

1. Find out if you really need a working capital loan: The first and only way to ensure a working capital loan is beneficial for your business is by applying for it only when required. So, if you are applying for the said credit facility, ask yourself if your business really needs it. 

2. Make optimal use of the loan: There’s a defined process for availing a loan, but there’s no defined way to use the borrowed amount. Hence, it becomes very difficult to find out the optimal ways to use a loan. To answer this, sit down with your entire operation and management team and find out prospective areas which can help in overall growth of your business with a bit of investment. That’s where you should invest the borrowed money.