Differences between Net Working Capital and Gross Working Capital
Differences between Net Working Capital and Gross Working Capital
Gross working capital (GWC) is one measure of the total financial resources of a company. It is calculated by adding up current assets like short-term investments, cash, accounts receivable, marketable securities, and inventory. Liabilities are not considered when determining the gross working capital of a company, and in that regard, GWC only presents a limited idea of its financial standing.
Let us say a company in the US takes out a loan of $300,000 to finance expansion. On its books of account, the same company may have $300,000 jotted down, which would increase the total assets and the gross working capital. A loan amount would add to the current liabilities, and not reflect in the gross working capital.
Net working capital offers a more thorough and comprehensive picture of the financial strength of a company. It is worked out by taking the total current assets of that company and subtracting current liabilities. A company’s current liabilities include employee salary amounts, accounts payable, taxes, and debt. If it takes out a business loan of $50,000 that is scheduled for repayment in a year’s time, then the net working capital will not increase, because even as it adds to assets, it also adds to liabilities.
