Every business needs working capital to meet daily operating needs. Without it, a business cannot meet creditors demands as they fall due. Working capital has two concepts, the gross working capital and net working capital. This article focuses on the first one.
What is gross working capital?
This is the current asset of a business.
It can also be defined as part of the capital that includes all short term assets.
Examples of gross working capital
1. Cash in hand
2. Cash at the bank (current account)
3. Call account (fixed deposits account)
4. Short term investments
5. Short term marketable securities (T-bills)
6. Account receivables
Key Explanations of gross working capital
This concept is narrow in scope. It does not explain how working capital affects the entity’s current liabilities.
It is the firm’s operating circle or circulating capital. Current assets are also referred to as circulating capital. This is because it is cash that is used to buy inventory, invest in fixed deposits, short term securities and other investments.
Inventory convert to debtors and later on cash. Fixed deposits, short term securities and other short term investments can be sold for cash within three months. This can be reverted to inventory, fixed deposits, short term securities and investment. And it continues in the circle (or circulating)
The use of Gross working capital by management is likened to speaking half-truth. It is only after current liabilities are compared with current assets that the true meaning of working capital can be explained and analyzed.
It is the invested capital of the business for a short term period. A short term period in finance means a period between three months to one year.
Some short term working capital can be used immediately. For example, cash can be used right away. Also, inventory may be purchased today and sold the following day.
We can understand this by looking at the statement of financial position of Nestlé Nigeria Plc gives more light to it.
From the statement, the current assets or gross working capital figure is 107 billion Naira in 2019 and 82.7 billion Naira in 2018. You may also notice the components of current assets for Nestlé Nigeria. Aside from what is stated in this article, you may have also noticed other classifications. Including contract assets and prepayments.
To conclude, gross working capital is not a complete concept of working capital. But for literary reasons, it is necessary to understand it. Also, it is similar to the current assets of a company. Therefore, if a company does not have current liabilities (which is not common in business), then the gross working capital model becomes the net-working capital for that business.