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. 

The current assets and current liabilities in a ratio of 2:1 is considered to be sound. This ratio implies that a company has sufficient funds to meet its current liabilities and operating expenses. Another important thing that you must know is that the net working capital may not always increase with every increase in gross working capital. It will increase only when current assets increase without any increase in current liabilities. 

Calculation: Net Working Capital = Current Assets-Current Liabilities

Read Also: Concept of Working Capital: Gross and Net Working Capital