Gross Working Capital
Gross working capital plays a vital role in assessing a firm’s
stability. Measuring a company’s cash flow indicates the
efficiency of accounting procedures. Depending on the results, a
firm owner can work towards growth and expansion.
The availability of current assets further substantiates a
firm’s credibility in financers’ eyes. Hence, companies should
adopt ways to manage the working capital effectively for
To that end, entrepreneurs can seek out financing solutions like
invoice discounting. It allows businesses to free up their
tied-up cash in accounts receivables early to manage working
capital better. KredX, a leading integrated cash flow solution,
offers invoice discounting solutions in less than 72 hours.
What Does The Gross Working Capital Mean?
Gross working capital is the total sum of a firm’s current
assets, convertible to cash within a year. The assets include
account receivables, cash, marketable securities, inventory, and
short-term investments. It usually denotes a company’s financial
strength to meet the current liabilities.
It is imperative to know that a company's balance sheet can be
assessed by subtracting current liabilities from gross working
capital. This will be equal to net working capital.
Though gross working capital gives a glance at a firm’s
operational strength, it isn’t practical to judge a company
completely based on it. That’s because it shows an enterprise’s
short-term financial health and resource usage, not the current
A positive working capital indicates current assets outvalue
current liabilities. This can be expressed through the working
capital ratio. When the ratio is less than 1.0, a firm may have
issues with clearing the dues in the short term.
In this situation, borrowing finances may leverage the gross
working capital but increases current liabilities. This will
draw a negative picture and degrade a company’s reputation in
terms of working capital management.
Financers would believe a firm is unable to meet its regular
cash requirements and avoid lending. Hence, a healthy gross
working capital is essential to maintain the brand name and keep
everyday operations afloat.
How To Calculate Gross Working Capital?
The gross working capital used by a business can be calculated
with the below-mentioned formula.
Gross Working Capital = Cash and marketable securities + cash
receivables + short-term investments + inventory + other paid
One can easily determine the gap between gross working capital
and current liabilities to evaluate a firm’s short-term
financial health. Here, a positive picture would indicate that
the current assets are greater than its current liabilities.
To analyse year-on-year or quarter-on-quarter improvement,
individuals can compare the changes in current assets and
liabilities over the years.
For instance, suppose a company has trade receivables of Rs. 4
lakhs, inventory worth Rs. 6 lakhs and a cash equivalent of Rs.
3 lakhs. The gross working capital will be the sum total of the
Following the formula, Gross working capital = Rs. 4 lakhs + Rs.
6 lakhs +Rs. 3 lakhs.
The value stands at Rs. 13 lakhs. Let’s say it was Rs. 10 lakhs
in the previous fiscal year.
However, the current liabilities of the same firm in the current
year shows Rs. 10 lakhs while it was Rs. 6 lakhs in the previous
Therefore, the company’s gross working capital grew nearly Rs. 3
lakhs, but net working capital reduced by Rs. 1 lakh.
This assessment can be used to determine a firm’s operational
efficiency and how it’ll fare in terms of growth. What’s more
important to see is whether a decrease or increase in net
working capital adds to the productivity or operation efficiency
of a firm or is it a product of poor working capital management.
What Is The Difference Between Gross Working Capital And Net
Since both net working capital and gross working capital play a
crucial part in evaluating a firm’s operation profile,
understanding the difference becomes crucial.
The table underneath focuses on the basic differences between
these accounting concepts.
Gross Working Capital
Net Working Capital
Gross working capital is calculated by adding all
current assets of a firm.
It is evaluated by subtracting a firm’s current
liabilities from current assets.
This denotes a company’s current assets.
It shows whether a firm can pay off the operational
expenses and dues or current liabilities.
Gross Working Capital equals cash and marketable
securities + receivables + inventory +
short-term investments + other assets
Net working capital is equivalent to total current
assets – total current liabilities.
Gross working capital is useful in financial
management. It helps in determining the short-term
financial strength of a firm.
Net working capital is useful for an accounting
system. It is a financial tool that estimates a
company’s operational competence.
Understanding the importance of gross working capital is
essential for companies in their growth stage. They can easily
track down the loopholes and work on their improvement. It would
further aid them in managing current liabilities better and perk
up the working capital ratio for a strong brand name. For that
purpose, invoice discounting solutions from KredX can help
companies avoid the strain of a liability on their balance sheet
while ensuring their cash flow is never in the negative.
Gross working capital is the sum of total assets
prior to the deduction of liabilities due in a
A company’s gross working capital increases when
its trade receivables are up, cash is realised,
it’s stocked up on inventory, or made short-term
investments in various channels.
The gross working capital is based on a
quantitative concept as it emphasises analysis of
pre-existing numerical data. Moreover, gross
working capital is the sum total of all the
company's current assets.