What is the difference between gross working capital and net working capital?
Answers
Net working capital, on the other hand is the difference between the current assets and the current liabilities. With reference to the term defined above, net working capital is the gross working capital minus any borrowed funds for the short-term, accounts payable, and add-on liabilities.
Gross working capital is the total amount of a company's current assets. It includes cash on hand, accounts receivable, inventory and short-term investments. Liabilities are not included in this calculation, so gross working capital offers only a limited description of a company's financial status.
Net working capital is a more accurate and complete measure of the liquidity health of a business. It is calculated by adding up the firm's current assets – cash, short-term investments, accounts receivable and inventory – and subtracting all of its current liabilities. (Working Capital Ratio = Current Assets minus Current Liabilities) Examples of items in current liabilities are: accounts payable, customer deposits, short-term loans, interest payable, taxes, current maturities of long-term debt and all other liabilities due within one year