Gross Working Capital

Within an organisational setup, gross working capital is useful in measuring a firm’s available cash flow. Consequently, it holds a vital place in the accounting procedures and helps both business owners and financial analysts take significant financial decisions. Nonetheless, firm owners must adopt measures of effective management of gross working capital to ensure overall profitability.

What is Gross Working Capital?

Gross working capital refers to the total current asset quantum possessed by a company at any given point in an accounting year.

It makes up all those assets which can be readily converted into cash within an accounting period.

Typically, it includes assets like – cash, inventory, accounts receivable, marketable securities, commercial paper and short-term investments.

In other words, it is the amount available with a firm to fund its current asset-related requirements.

Under any given situation, the gross working capital of a company will always be negative. It must be noted that working capital alone does not provide a complete picture of a firm’s liquidity

That is because liabilities of a firm are not included in the computation of this type of working capital.

For instance, borrowing funds may increase the gross working capital of a firm, but simultaneously the firm’s current liabilities will increase too. Resultantly, the financial image projected is inaccurate or rather incomplete.

Hence, it can be said that gross working capital does not add anything significant to a firm’s assets. However, it is quite essential when it comes to keeping everyday operations afloat.

Gross Working Capital Calculation

The gross working capital formula used by business owners and financial analyst is expressed as –

Gross Working Capital = Total Value of Current Assets 

Or,

Gross Working Capital = Receivables + Cash and Marketable Securities + Inventory + Short Term Investments + other Current Asset

It must be noted here that subtracting current liabilities from current assets gives us working capital or net working capital of a firm.

Now, if the resulting working capital is positive, it would mean that the firm’s current assets are greater than its current liabilities.

Subsequently, business-owners must find the working capital ratio of the company to gauge its financial health. The formula of the ratio is –

Working capital ratio = Current Assets / Current Liabilities 

Notably, a ratio that is less than 1 indicates that the company may struggle to pay back its short-term debt

However, an excess of working capital may not prove beneficial for the company and should be allocated elsewhere to benefit from it accordingly. In other words, a firm’s management must ensure proper working capital management to achieve the perfect balance.

Gross Working Capital Example

Take a look at the excerpt of a Balance Sheet to gain a better understanding of the placement and treatment of the components of gross working capital.

Significance of Gross Working Capital

These pointers emphasise the importance of gross working capital –

• A thorough analysis of gross working capital against current liabilities offers a fair idea about a company’s current liabilities.
• Assessing the gross working capital of a firm offers an insight into the anticipated cash flow that will be available to business owners.
• It helps to ascertain the financial standing and capability to repay liabilities adequately.
• It helps to compute the working capital ratio, which in turn helps to ascertain a firm’s capacity to pay off liabilities on time.
• Gross working capital paves the way for investors and shareholders to make informed investment decisions.
• With the help of gross working capital, business entities and financial analysts can compute net working capital of a company. Under any given situation, the net working capital of a firm is considered to be more proficient in determining the liquidity of a firm.

Like discussed, the shortcoming of gross working capital arises from the fact that it does not serve as an efficient financial metric. Using it to gauge a company’s financial performance or profitability will only lead to half-baked outcomes.

With that being said, let’s check out the fundamental differences between working capital and gross working capital concept to understand them better.

Difference between Gross Working Capital and NWC

This table below focuses on the primary differences between gross working capital and net working capital –

To make the most of gross working capital, business entities must account for both its benefits and shortcomings. It will help them to manage and optimise the firm’s available current assets. They should also adopt effective techniques and use reliable financial metrics like working capital ratio among others to project a more accurate financial image.