Masterclass – Gross Working Capital

 

Gross Working Capital vs Net Working Capital

Gross Working Capital

Gross Working Capital is the sum of all of a company’s current assets (those assets that can be converted to cash within a year or less). Gross Working Capital includes assets such as cash, business cheque and savings accounts, accounts receivable (debtors), short-term investments, inventory and marketable securities. From Gross Working Capital, we subtract the sum of all of a company’s current liabilities (those liabilities due in the next year or so) to get Net Working Capital.

Companies need to balance the right amount of working capital to function optimally. With too much working capital, they could look at current assets which would be better put to other uses, eg extra cash to purchase better, more efficient equipment that would save costs. With too little working capital, a company may not be able to meet its day-to-day cash requirements. The correct balance is obtained through Working Capital Management, and an often-quoted ratio is to have twice the current assets to current liabilities. If you divide the current assets by current liabilities, you have the Current Ratio see HERE.

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