- Definition of Gross Working Capital
- How to calculate Gross Working Capital? Give the formula.
- An Example of Gross Working Capital
Definition of Gross Working Capital
Gross working capital is a quantitative concept that indicates the total current assets a company or a business firm holds in an accounting year, including cash, inventory, accounts receivable, and other short-term assets that can be quickly converted into cash within a year or less. It represents the company's ability to meet its short-term financial obligations and carry out its day-to-day operations.
The formula for Gross Working Capital is:
Gross Working Capital = Current Assets
Gross working capital is a company's net working capital before deducting current liabilities.
Gross working capital gives a glimpse of the short-term financial status of a firm or company. Hence, Gross working capital is not portrayed as a real financial status of a business firm. A firm can be in big financial distress but denotes a good Gross working capital on paper. So one should not blindly believe in this popular concept of financial management. He/she should evaluate the Net Working Capital of a firm before making any decision.
How to calculate Gross Working Capital? Give the formula.
Gross working capital = Total current assets a business firm holds in a 12-month period
Or
Gross working capital = current investments + cash + trade receivables + short-term assets + inventory + commercial papers + other current assets
The firm or company should also evaluate the Current liabilities acquired in a 12-month period for better financial analysis.
An Example of Gross Working Capital
For instance, let’s understand the calculation of the Gross working capital by the following example:
Cash = Rs. 55,000
Trade receivables = Rs. 10,000
Current investments = Rs. 80,000
Commercial papers = Rs. 25,000
Other current assets = Rs. 5,000
Gross working capital = Rs. 55,000 + Rs. 10,000 + Rs. 80,000 + Rs. 25,000 + Rs. 5,000
Gross working capital = Rs. 1,75,000