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Gross Working Capital Vs. Net Working Capital: Definition, Formula, Example
Gross Working Capital, or GWC, is an important metric determining a company's internally available cash flow. That is why it is a crucial part of a firm’s accounting procedures, allowing financial analysts and company owners to make crucial decisions. Considering the high significance of GWC in a company’s total profitability, many business owners implement effective strategies for better capital management.
Based on a company’s financial strength and liquidity, the parameter demonstrates how easily it can handle its short-term obligations, such as trade creditors, overdrafts, and debentures. It also includes the value of inventory that the company holds, helping analysts calculate a company's takeover cost. It differs from Net Working Capital, which is the difference between a firm’s current assets and liabilities.
Since Gross Working Capital is a vital variable to calculate a company's worth, it's crucial to learn what GWC is, understand its importance, and know how to calculate it.
What is Gross Working Capital?
Gross Working Capital is a company’s total value of current assets at a particular time. It includes all assets that the owners can immediately convert into cash. Typically, they include the company’s cash, accounts receivable, inventory, commercial paper, marketable securities, short-term investments, etc. Simply put, GWC is the amount of assets a company has available to meet its immediate needs. Borrowing Working Capital Loans from the best lending institutions like Hero FinCorp helps improve a firm’s GWC without adding to its financial burden. Business owners can enhance their GWC by taking a loan and repaying it over time in convenient EMIs.
How to Calculate Gross Working Capital?
The Gross Working Capital formula that financial analysts and business owners use to calculate the GWC is as follows:
Gross Working Capital = Total Value of Current Assets
They can also use it like this:
Gross Working Capital = Receivables + Cash and Marketable Securities + Inventory + Short-term Investments + Other Current Assets
Basically, GWC is the sum of all cash and assets a company holds, including marketable securities, accounts receivables, interest receivable, expected inventory sales, and other assets a company owns to yield economic benefit. The Gross Working Capital formula omits liabilities and focuses solely on the company’s assets.
Importance of Gross Working Capital Management
Gross Working Capital management is extremely important for a business for the following reasons:
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GWC helps understand the assets a company can assess and determine the expected cash flow.
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Comparing GWC with the current liabilities helps objectively assess a firm’s current obligations in relation to its assets.
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Company owners can determine their business’s current financial standing, helping them assess their loan repayment capacity and make better borrowing decisions.
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GWC helps calculate a firm’s working capital turnover ratio, accurately showing its financial position.
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Financial analysts and business owners can use GWC to calculate the firm’s Net Working Capital, a more accurate determiner of a company’s liquidity.
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With an accurate GWC estimate, company owners can gain insight into their expected cash flow.
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GWC helps shareholders and investors make their investment decisions in the company.
Gross Working Capital vs. Net Working Capital
While Gross Working Capital is the total amount of all assets a company owns, Net Working Capital is the difference between a firm’s current assets and liabilities. For a clear understanding, let’s explore the difference between gross working capital and net working capital based on various parameters:
| Parameter | Gross Working Capital | Net Working Capital |
| What is it? | GWC is the total of all assets a company owns and can liquidate. | NWC is the difference between a firm’s current assets and liabilities. |
| Type of Concept | It is a quantitative concept. | It is a qualitative concept. |
| What does it indicate? | GWC shows the amount a company has available at a given moment to cover current obligations.
| NWC shows a firm’s capacity to handle daily expenses and pay off current liabilities without a financial crunch. |
| Impact of a Loan | The value of GWC increases if you borrow a Working Capital Loan. | A loan does not increase a company's Net Working Capital, but it grows only by adding to the income or selling assets. |
| Formula to Calculate | Gross Working Capital = Receivables + Cash and Marketable Securities + Inventory + Short-term Investments + Other Current Assets
| Net Working Capital = Total Current Assets - Total Current Liabilities |
| Appropriate for | GWC is more suitable for small businesses. | NWC is more suitable for partnership firms and sole traders. |
Conclusion
Hope this article helped you learn about GWC, its importance for company owners and financial analysts, and how Gross Working Capital and Net Working Capital are different. GWC is the sum of a company's assets, including cash, marketable securities, inventory, receivables, etc., while NWC is the sum of its assets minus its liabilities. We at Hero FinCorp facilitate business owners to take a Working Capital Loan at the best rates to fill the gap and portray a better financial position in the market. Notably, Working Capital Loans can be used for any business-related purpose.
Frequently Asked Questions
1. What is the formula for gross working capital?
Here’s the formula: Gross Working Capital = Receivables + Cash and Marketable Securities + Inventory + Short-term Investments + Other Current Assets. Simply put, it is the sum of all the cash and assets a company owns and can liquidate immediately.
2. What are the benefits of gross working capital?
Calculating GWC is beneficial in several ways. Most importantly, it helps manage liquidity, continue operations, meet short-term obligations, manage cash flow, support business growth and expansion, manage risk, and improve creditworthiness.
3. How do you calculate the gross working capital?
Gross Working Capital can be calculated by finding the sum of all the cash, assets, and accounts receivable a company can liquidate immediately to fulfil its short-term needs.
4. What are the two aspects of gross working capital?
Cash and Assets are the two aspects of Gross Working Capital. Cash represents readily available funds, while assets encompass inventory, property, and accounts receivable that can be swiftly converted into cash.
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