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written by | February 21, 2022

What is the meaning of Gross Working Capital?

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The amount of money a company must have to meet its various needs is its gross working capital. A company's current assets are those assets that can be converted into cash within an accounting year. This includes cash and bank balances as well as short-term investments, commercial paper, and marketable securities. Gross working capital is an important factor in gauging a company’s financial strength and liquidity. It denotes a company's ability to repay short-term liabilities such as debentures, overdrafts, and trade creditors. Gross working capital also aids in estimating the market value of a company during a takeover because it reflects the value of the company's inventory. However, gross working capital alone cannot measure a company's liquidity because it does not account for the company's current liabilities such as accounts payable or any outstanding loans.

Did you know? Fixed assets are not included in working capital because you cannot convert them to cash easily.

Calculation of Gross working capital:

Gross working capital = The total value of the current assets of the company

Current assets include cash and cash equivalents, current investments, short-term loans & advances, inventory, trade receivables, and other current assets. Current liabilities include trade payables, short-term borrowings, short-term provisions, and other current liabilities.

Net Working capital = Total current assets - Total current liabilities

When a business has a surplus of current assets over current liabilities, it is said to have a positive working capital. It indicates that the company has enough funds for its operations. Negative working capital implies that the company’s current liabilities are more than its current assets. This may sound alarm bells of financial distress for the company because it may be unable to repay its creditors.

To assess the company’s financial health, business owners also calculate the working capital ratio:

Current Assets / current liabilities = Working capital Ratio

Also read: What Is Gross Salary? Know How To Calculate Gross Salary Or CTC

Example of Gross working capital:

Below is an example of the balance sheet and Gross working capital calculation of ABC Pvt Ltd:

Name of the company: ABC Pvt. Ltd.

Gross working capital is best defined as the sum of a company’s current assets. These assets represent the short-term financial resources of the company, which can be converted into cash within a time span of a year or less than a year. It includes inventory, cash and cash equivalents, debtors, marketable securities, and prepaid expenses.

Gross working capital = Trade receivables (debtors) + inventory + marketable securities + cash and cash equivalent + prepaid expenses. However, it does not take into account the current liabilities. 

Balance sheet dated - 31st March 2019

Difference between Gross working capital and Net Working Capital:

To better understand the concepts of gross working capital and net working capital, let's look at the fundamental differences between them:

Parameters

Gross working capital

Net Working Capital

Definition

Gross working capital is the total value of a company’s all current assets.

Net Working Capital is the difference between the value of a company’s all current assets and all current liabilities.

Concept

It is the value of current assets hence is a quantitative concept.

The value networking capital denotes the financial position of the company hence it is a qualitative concept.

Indicator

It indicates the amount of money available to fund current assets.

It demonstrates a company's ability to pay off existing liabilities and operating costs.

The financial health of the company

A company's liquidity cannot be measured by gross working capital as it considers only assets that can be converted into cash within a year

The true picture of a company's operating liquidity is provided by net working capital, which takes into account the company's financial obligations.

Formula

Gross Working Capital =

Cash accounts receivables Marketable Securities short term investments Inventory Other Current Assets

Or,

Gross Working Capital =

Receivables + Cash and Marketable Securities + Inventory + Short Term Investments + Other Current Assets

Net Working Capital = Total value of current assets – total value of current liabilities

Suitability

This metric is more appropriate for companies.

This metric is more appropriate for sole proprietorship and partnership firms.

Significance of Gross working capital:

Gross Working Capital is important to businesses for the following reasons:

·     The assessment of gross working capital provides an insight into the expected cash flow available to a business.

·     It helps in determining the financial standing and ability of a company to repay the liabilities on time.

·     It helps to calculate the company's working capital ratio, which is a more accurate indicator of the company's financial standing.

·     Gross working capital enables investors and shareholders to make well-informed decisions about making investments in a company.

Also read: Real-Time Gross Settlement (RTGS)- Definition & Importance

Conclusion:

This article gives you a complete understanding of how Gross working capital is used to measure a firm's available cash flow within an organisational setup. You can download the Khatabook App to avail of more details.

FAQs

Q: Do investments in working capital maximize the shareholders’ value?

Ans:

Working capital is the difference between current assets and current liabilities. This capital management includes less risks as it does not require interest and sourcing from outside providers. Investment in working capital can maximize shareholders’ value if the liquid assets can be speedily converted to cash.

Q: Are fixed assets included in Gross Working Capital?

Ans:

No. Fixed assets are not included. Only current assets, such as cash, are included in gross working capital because of their high liquidity. Due to their inability to be easily converted into cash, fixed assets are not a component of gross working capital.

Q: What do you mean by a working capital ratio of a company?

Ans:

Working capital is calculated by dividing the total amount of current assets by the total amount of current liabilities. It is also known as the current ratio. It reflects the company’s liquidity, which refers to the company's ability to meet its due payment obligations. The ideal working capital ratio, according to most analysts, is between 1.5 and 2.  This varies across different industries.

Q: What is working capital?

Ans:

Working capital is a measure of a company's short-term financial position that is calculated by subtracting the total value of current liabilities from the total value of current assets.

Q: What is the difference between the Gross Working Capital and Net Working Capital?

Ans:

The only difference between the GWC and NWC is that the latter takes into account the company's current liabilities. As a result, Net Working Capital can be both positive and negative. Creditors or trade payables, dividends payable, short-term loans, and long-term debts maturing within a year are examples of current liabilities.

Q: How do you calculate the gross working capital?

Ans:

Gross working capital = Total value of all current assets of the company.

Or 

Gross working capital = Cash, Accounts Receivables, Marketable Securities, Short Term Investments, Inventory, and other Current Assets.

Q: What are current liabilities?

Ans:

Financial obligations that must be paid off within a year or one operating cycle are referred to as "current liabilities." It is common for these kinds of debts to be paid off by using other current liabilities. Notes payable, accrued liabilities, accounts payable, unearned revenue, and the current portion of long-term debt are included in the current liabilities category.

Q: What are current assets?

Ans:

The types of business assets that can be easily converted into cash within a given year or business operating cycle are called current assets. Cash and other cash-related equivalents, inventory, marketable securities, prepaid expenses, accounts receivable, and other liquid assets are some examples of current assets.

Q: What do you mean by Gross working capital?

Ans:

Gross working capital is equal to the total value of all the current assets of a company. It includes accounts receivable, cash & bank balances, inventory, and marketable securities.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.