For a successful business, you need adequate working capital. Working capital is one of those types of loans that is called as the lifeline of any business because it is crucial for its smooth functioning and daily operations. While earning profits is important, effective working capital management is indispensable to keep the organization going. An essential step of managing the working capital effectively is, having an understanding of the types of working capital. Typically, there are two kinds of working capital - gross working capital and net working capital. While managing your business, you must know the difference between the two.

 

Here is a brief guide on gross and net working capital and the difference between the two.

 

What Is Gross Working Capital?

 

The capital invested in the current assets of a company is called gross working capital. The total amount of short-term funds that a company has and uses for its daily operations can be called gross working capital. In short, the total current assets of a company is its gross working capital. To clarify, current assets means the assets that can be converted in cash within a year, for example, inventory, trade receivables, cash and cash equivalents, current investments, marketable securities, etc.

 

Gross working capital is calculated as:

Gross working capital = total current assets

 

What Is Net Working Capital?

 

Net working capital is the difference between the current assets and current liabilities of a company. Depending on the value of your current liabilities and assets, it can have a positive or negative balance.

 

Current liabilities are short-term liabilities like short-term borrowings, outstanding expenses, accounts payable, etc. If the company’s investment is higher in current assets and has minimum liabilities, the net working capital would be positive. Similarly, if the company has a higher amount of current liabilities, it will have a negative working capital balance.

 

Negative working capital could indicate that the business is in a risky position and its borrowings are greater.

 

Net working capital is calculated by subtracting the value of current assets from the current liabilities.

Net working capital = current assets - current liabilities.

 

The success of a business significantly depends on the management of net working capital, as the businessmen should ensure that there is a right balance in the current assets and liabilities of the firm.

 

 

 

What Is the Difference Between Gross Working Capital and Net Working Capital?

 

 

Basis

Gross working capital

Net working capital

Meaning

It is the sum total of the current assets.

It is the difference between current assets and current liabilities.

Balance

The balance of gross working capital is always positive

Net working capital can show positive or negative balance

Indicator

Does not reflect the true value of the business

It displays the true liquidity position of the company

 

Understanding the gross and net working capital of the business is crucial to managing the working capital effectively. Ensure that you gather adequate knowledge about these types of working capital finance for effective working capital management.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.