Gross working capital is the total amount of current assets in an organisation. Current assets refer to those assets that can be turned into cash within 12 months. It includes cash in hand, stocks, accounts receivable, bank balances, short-term investments, marketable securities, etc.
However, it is not always possible to compute the liquidity status of a company by only current assets. The net working capital that includes current liabilities like loans, accounts payable, and other unpaid dues also need to be calculated.
What is gross working capital in India?
Gross working capital is the amount of money an organisation must possess to fulfil its various requirements. It symbolises an enterprise’s capability to pay off short-term liabilities like overdrafts, debentures, and outstanding payments.
However, gross working capital cannot measure a company’s liquidity until its current liabilities like amounts payable or unpaid loans are considered.
The formula for calculating gross working capital and net working capital
The formula to compute gross working capital is mentioned below:
Gross working capital = Total current assets
Total current assets = Cash + Stock + Receivables + Short term investment + Marketable securities + other assets
Net working capital = Total current assets – Total current liabilities
Importance of gross working capital in India
Following are the importance of gross working capital. They are:
- An organisation can determine its current liabilities while analysing the gross working capital.
- It enables the company to figure out its financial status alongside the ability to clear outstanding payments on time.
- It helps in calculating the working capital ratio to determine a company’s capability for repaying debts.
- After getting a proper estimation of gross capital, the company can expect better cash flow.
- Gross working capital enables shareholders and investors to prepare proper investment plans.
- Financial specialists can compute a company’s net working capital by using gross working capital.
Potential borrowers must consider the above points to ensure their business never runs out of working capital.
Financial institutions offer pre-approved facilities that speed-up the lending process. They provide these offers on various financial products like business loans, home loans and more. Applicants can check their pre-approved offers by inserting details like their names and contact numbers.
Difference between gross working capital and net working capital
Before opting for a business loan, an organisation must determine its working capital. It is classified into two types. These are gross working capital and net working capital.
Following are the key differences between gross working capital and net working capital. They are:
- A company’s gross working capital indicates its total current assets. On the other hand, net working capital is the difference between an organisation’s current assets and liabilities.
- In terms of concept, gross working capital is a quantitative concept. Net working capital, on the other hand, is a qualitative concept.
- Gross working capital shows the amount of money available to fund current assets and other responsibilities. In comparison, net working capital signifies a company’s ability to pay off operating charges and outstanding liabilities without hassle.
- An increase in borrowing raises the value of gross working capital, whereas it causes no effect on net working capital. The net working capital only rises if there is an increase in retained earnings or sale of fixed assets.
- Gross working capital is suitable for large enterprises. On the other hand, net working capital best suits solo-traders and partnership organisations.
- Gross working capital is involved in the task of measuring the financial backing of a company. However, net working capital is beneficial while estimating a company’s financial standing.
For getting the most out of gross working capital, businesses must consider both its pros and cons besides estimating exactly how much working capital their business needs. It will help them manage and improve the firm’s current assets. They must use some strategies and measures to get a more precise view of the financial status of their organisation.
Originally posted 2022-07-12 08:32:33.