Difference Between Gross Working Capital and Net Working Capital
The working capital of a company is one of the most important measures in any financial statement which is also easy to calculate. It is a portrayal of the actual financial condition of a company which allows to the investors to know about the (financial) health of a company. People remain befuddled between Gross working capital and Net working capital as they cannot tell the difference between them. This article will clear these two concepts to take away any doubts of those who are interested in the health of a company.
As mentioned earlier, the working capital alludes to its financial health and is calculated by subtracting its current liabilities from its actual resources. If it is positive, it means that the company has financial good health and is able to pay its debts by selling some of its assets. If it is negative, the company cannot meet its liabilities of debts even if it sells its actual capitals as cash, receivables from account and inventory. When the working capital is in red, it is a signal that the operational effectiveness of company is really down or it does not produce enough sales and in the most unfortunate scenario, the negative working capital can lead to bankruptcy for a company. The working capital is a good indicator for the investors to invest or be move away from a company.
Two definitions of capital of rotation are in the vogue namely the net working capital and the gross working capital. The gross working capital is the sum of all the current resources of a company, while the net working capital is the excess of current resources over current liabilities. It implicates apparently that it is the net working capital that is significant to be the investors as it indicates a lot of profit and loss of a company.
So, gross working capital is just to point out the capital which a company has invested in the current resources. It does not take into account the liabilities of the company and it is not a true indicator of the financial health of a company. The net working capital reflects operational effectiveness and capacity to produce more sales.