What is gross working capital?
Gross working capital refers to the total current assets of a company. Current assets are those that can be converted into cash within 12 months. These include cash on hand, bank balances, accounts receivable, inventory, short-term investments, marketable securities, and more.
However, you cannot determine a company's liquidity position just by looking at the gross working capital. To calculate the net working capital, which shows the company's liquidity, you also need to consider current liabilities like accounts payable, short-term loans, and other outstanding debts.
Components of Gross Working Capital
Gross working capital includes assets like cash, accounts receivable, inventory, short-term investments, and marketable securities. Unlike net working capital, gross working capital only looks at what the company owns and does not include liabilities. It is the total of current assets, which include:
- Cash and cash equivalents
- Marketable securities
- Accounts receivable to be collected within the next year
- Interest receivable within the next year
- Inventory expected to be sold within the next year
- Other assets that are expected to generate economic benefit within the next year
Gross working capital formula
The formula of gross working capital is:
- Gross working capital = Total current assets
Or,
- GWC = Receivables + inventory + short-term investments + cash + marketable securities + other current assets
Now that you know what gross working capital is and its formula, read on to learn how to calculate it.
Gross working capital calculation
As per the formula stated above, gross working capital is the sum of all the company's current assets. You can use the formula mentioned above to calculate the GWC of any company.
A point to remember here is that positive working capital denotes that a company has enough funds to manage its day-to-day operations properly. Negative working capital will portray the opposite, and it is considered an early indication of a firm in financial distress.
Gross working capital example
Here is an example of how to calculate gross working capital. Suppose that a firm has the following current assets:
- Cash and equivalent: Rs. 45,000
- Marketable securities: Rs. 50,000
- Inventories: Rs. 8,000
- Accounts receivables: Rs. 20,000
- Short-term investments: Rs. 70,000
- Other current assets: Rs. 10,000
In this case, the total gross working capital of this firm will be:
Gross working capital = Rs. 45,000 +Rs. 50,000+ Rs. 8,000 + Rs. 20,000 + Rs. 70,000 + Rs. 10,000
GWC = Rs. 2,01,000
Significance of gross working capital
Gross working capital is a financial metric that measures a company's ability to meet short-term financial obligations and fund daily operations. It refers to the total value of a company's current assets, including cash, inventory, accounts receivable, and short-term investments, minus its current liabilities, which include accounts payable, accrued expenses, and short-term debt.
Maintaining an adequate level of gross working capital is crucial for any business because it ensures that the organisation has enough liquidity to cover operational expenses, manage cash flow, and seize growth opportunities when they arise. A robust working capital position enables a company to weather temporary dips in revenue, pay suppliers, and meet payroll obligations, among other things.
Therefore, businesses must monitor their gross working capital position regularly and take proactive measures to improve it, such as reducing inventory levels, negotiating better payment terms with suppliers, and optimising cash collections.
Difference between gross working capital and net working capital
S.N. |
Parameters |
Gross working capital |
Net working capital |
1 |
Definition |
Gross working capital is the total of all current assets of a company |
Net working capital is the difference between a company's current assets and current liabilities |
2 |
Concept |
It is a quantitative concept |
It is a qualitative concept |
3 |
Indicator |
Increase in value |
Indicates the company’s ability to pay off operating expenses and current liabilities without difficulty |
4 |
Formula |
Gross working capital = Cash + Marketable Securities + Inventory + Short-Term Investments + Other Current Assets |
Net working capital = Total current assets - Total current liabilities |
5 |
Suitability |
Suitable for companies |
Suitable for partnership firms and sole traders |
6 |
Usage |
Helps to assess the financial position of a company along with other financial metrics |
Useful for assessing a company’s ability to meet its short-term obligations |
7 |
Popularity |
Quite popular in financial management |
Widely used in accounting systems |
8 |
Effect of borrowing |
Gross working capital increases with more borrowing |
An increase in debt does not affect net working capital, but retained profits and asset sales can increase it |
To make the best use of gross working capital, businesses should consider both its advantages and limitations. This will help them manage and optimise available current assets. It is also important to use reliable financial tools, such as the working capital ratio, to get a clearer picture of the financial situation.
Conclusion
In conclusion, understanding and managing gross working capital is essential for businesses to maintain smooth operations and meet their short-term financial obligations. By regularly tracking current assets and liabilities, companies can ensure they have enough liquidity to cover daily expenses, manage cash flow, and even take advantage of growth opportunities. For businesses looking to strengthen their working capital, strategies such as improving inventory turnover or negotiating better supplier terms can prove useful. Additionally, seeking financial support, such as a business loan, can help manage cash flow gaps or fund expansion plans. A balanced approach to gross and net working capital ensures a business is well-equipped to handle financial challenges while positioning itself for long-term success. Regular monitoring and careful management of these financial metrics are key to sustaining business growth and profitability.
Frequently asked questions
- A detailed analysis of gross working capital against current liabilities gives a clear idea of a company's current financial obligations
- Evaluating a firm's gross working capital provides insight into the expected cash flow available to business owners
- It helps assess the company’s financial health and its ability to repay debts properly
- It aids in calculating the working capital ratio, which helps determine whether a firm can pay off its liabilities on time
- Gross working capital allows investors and shareholders to make better-informed investment choices
- Using gross working capital, business owners and financial analysts can calculate the net working capital of a company. In most cases, net working capital is considered a more effective measure of a company’s liquidity
What are the factors affecting gross working capital?
Several factors affect gross working capital in an Indian context. These include the company's business cycle, sales volume, and inventory levels. Seasonal fluctuations in demand also impact the working capital needs. Additionally, the company's credit policies, both in terms of receivables and payables, play a role. Economic conditions, government policies, and inflation can also influence working capital requirements. Lastly, the efficiency of operations and management of cash flows are crucial factors in determining gross working capital.
