Gross Working Capital: Definition, Calculation, Example, Vs. Net

What Is Gross Working Capital?

Gross working capital is the sum of a company's current assets (assets that are convertible to cash within a year or less). Gross working capital less current liabilities is equal to net working capital, or simply "working capital;" a more useful measure for balance sheet analysis.

Understanding Gross Working Capital

Gross working capital, in practice, is not useful. It is just one half of a picture of a company's short-term financial health and the ability to use short-term resources efficiently. The other half is current liabilities. Gross working capital, or current assets, less current liabilities, equates to working capital. When working capital is positive, it means that current assets are greater than current liabilities. The preferred way to express positive working capital is the ratio of current assets to current liabilities (e.g., > 1.0).

If this ratio is less than 1.0, then a company may have trouble paying back its creditors in the short term. Negative working capital is when liabilities outstrip assets and indicate that a company may be in distress. A company needs just the right amount of working capital to function optimally.

With too much working capital, some current assets would be better put to use elsewhere. With too little working capital, a company may not be able to meet its day-to-day cash requirements. Managers aim for the correct balance through working capital management.

Some methods in which a company can improve its working capital ratio include a reduction in time to collect receivables from customers, extending payable time frames with suppliers, a reduction on the reliance on short-term debt, and appropriately managing inventory levels.

Gross Working Calculation

Gross working capital includes assets such as cash, accounts receivable, inventory, short-term investments, and marketable securities. Unlike net working capital, gross working capital omits liabilities and only focuses on what the company owns. Gross working capital is the sum of current assets including:

• Cash and cash equivalents
• Marketable securities
• Accounts receivables to be collected within the next year
• Interest receivable to be collected within the next year.
• Inventory expected to be sold within the next year
• Other assets owned by the company expected to yield economic benefit within the next year.

Example of Gross Working Capital

An examination of gross working capital versus current liabilities provides many insights into a company's operations. The changes in the components of current assets and liabilities from period to period can lead to further financial analysis to assess the short-run financial condition of a company. Sometimes there may be a surprise to an investor that a working capital ratio fell below 1.0. Breaking down the components and following the money would explain why.

For example, Company ABC reported gross working capital of $7 billion at the end of the fourth quarter of 2019, versus $7.23 billion in current liabilities, for a working capital ratio of 0.97. The bulk of current liabilities is coming from the short-term debt of $3 billion.

At the end of the third quarter of 2020, ABC had paid off its entire $3 billion in debt, without taking on more debt. Gross working capital stood at $7.8 billion and current liabilities stood at $5 billion, resulting in a working capital ratio of 1.56. Between the end of 2019 and September 2020, the company repaid its short-term debt, thereby reducing current liabilities and sending the working capital ratio comfortably above 1.0.

Real World Example of Gross Working Capital

On its March 31, 2022 balance sheet, Microsoft reported $153.922 billion of total current assets. This was comprised of cash, cash equivalents, short-term investments, accounts receivable, inventories, and other current assets. The company reported total assets of $344.607 billion of total assets, though all long-term assets are excluded from gross working capital.

Microsoft also reported $77.4 billion of total current liabilities. While this amount would be subtracted from current assets to arrive at net working capital, it is excluded from consideration for gross working capital. Therefore, as of March 31, 2022, Microsoft carried $153.922 billion of gross working capital.