Classifying Working Capital Based on Balanced Sheet View
It is also possible to classify it into different types based on the operating cycle view, but we are not discussing that here.
Gross Working Capital
Gross working capital is the total of all current assets of a company. CAs are short-term assets that can be turned into cash in one year’s time. The gray area in current assets’ or GWC’s management is its unpredictability; that is, it is extremely tough to ascertain the precise time of either’s conversion into cash. Such a nature is problematic because liabilities happen in the normal course of business, and these do not wait for current assets to realize. This gap results in a need for working capital funding.
Net Working Capital
There are a couple of ways to understand net working capital (NWC). First off, one says that NWC is just the difference between a company’s current assets and liabilities. The other perspective grants a little deeper meaning of this term, and according to it, NWC is a part of current assets that are not directly financed by fixed assets. As opposed to GWC, NWC is more important for effective financing and management of funds.