Concepts of Working Capital
There are two concepts of working capital gross and net.
o Gross working capital: refers to the firm’s investment in current assets. Current assets are the asset which can be converted into cash within an accounting year and include cash, short-term securities, debtors, accounts receivable or book debts) bills receivable and stock (inventory).
o Net working capital: refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets.
The two concepts of working capital – gross and net- are not exclusive; rather, they have equal significance from the management viewpoint.