Working capital refers to difference between current asset and current liabilities, working capital can be further subdivided as gross working capital and net working capital. Let’s look at both of them
Gross Working Capital – Gross working capital refers to the amount which the company has invested into the current assets; current asset includes cash, stock, debtors or anything which can be converted into cash within a year.
Net Working Capital – Net working capital refers to the difference between the current assets and current liabilities of the company, current asset as explained above will be same and current liabilities include trade creditors, bills payable, outstanding expenses or any debt which company has to pay within a year.
As one can see from the above that both gross working capital and net working capital are different because under gross working capital one calculate the amount which the company has invested into current assets, which implies that current liabilities are excluded while calculating gross working capital, which is not the case under net working capital where one calculate the difference between current assets and current liabilities.