Working capital is the amount of money a company has left over after subtracting current liabilities from current assets. It is required for any business to pay its trade creditors for its day-to-day trading operations. Working capital is basically of two types, Gross working capital and Net working capital. These are discussed below –
WHAT IS GROSS WORKING CAPITAL ?
Gross working capital is a measure of a company’s total financial resources. Basically, it is the total amount of a company’s current assets which includes cash on hand, accounts receivable, inventory and short-term investments but does not include the liabilities. Therefore, it does not present a true and complete picture of financial position of the firm.
It is calculated as –
Gross Working Capital = Trade receivables (debtors) + Inventory + Marketable securities + Cash and cash equivalent + Prepaid expenses
WHAT IS NET WORKING CAPITAL ?
Net working capital is calculated by taking a company’s total current assets and subtracting any current liabilities . Such current liabilities include trade payables or creditors, short-term loans, dividends payable, long-term debts maturing within a year, etc. It is calculated as –
Net Working Capital = Current Assets – Current Liabilities
It shows a more comprehensive and accurate picture of financial position of the firm.
GROSS WORKING CAPITAL VS NET WORKING CAPITAL
The following are the main points of difference between Gross Working Capital and Net Working Capital :-
|BASIS||GROSS WORKING CAPITAL||NET WORKING CAPITAL|
|Calculation||It is calculated by adding up all of the company’s current assets.||It is calculated by subtracting the current liabilities from the company’s current assets.|
|Nature||It is quantitative in nature.||It is qualitative in nature.|
|Accuracy||It does not show true and accurate financial position of the company.||It shows true and accurate financial position of the company.|
|Suitability||It is suitable for companies.||It is suitable for partnership firms and sole traders.|
|Value||It is always positive.||It can be both negative as well as positive.|
|Indicator||It indicates the amount available to fund current assets and related requirements.||It indicates a firm’s capability to pay off operating expenses and current liabilities without any problem.|
Thus, the difference between the gross working capital and net working capital must be kept in mind in order to get a sound and analytical view of the financial position of an organization.