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.