What is Working capital?
To run a company, to fund its basic trading operations like purchase of raw material, production of goods, to pay off wages, to sell produced goods, business needs funds. And working capital means, the fund that is/ that should be available to the business, to meet its above mentioned operational expenses, until the company collects receipts from the customers for the sales previously made.
In a common man's terms, it is the money that should be available, for meeting his urgent financial needs.
What is Gross Working capital?
It is sum total of the current assets of organization. In financial terms, it is the total amount available for financing of current assets.
Current asset defined:
Current assets represents the value of all trade assets that can be consumed, sold, or converted into cash within a year. eg Cash in hand, bank balance, cash equivalents like Treasury bills, Receivables, short term investments, prepaid expenses etc. The Gross working capital concept does not consider the current liabilities in picture and is a book term rather than a practical concept used for assessment of financial needs.
What is net working capital then>?
Net working capital is the difference between current assets and current liabilities. It is one among the reliable indicator of liquidity status of the company, since it takes into account the financial obligations as well of the company (ie current liabilities).
Current liability defined:
Current liabilities represents trade obligations that are expected to be settled/paid off within a year.eg Trade creditors, outstanding expenses, short term loans availed etc
Lending institutions adopt ' Net working capital' approach, to assess the financial requirements of the borrower.