What is Net, Gross and Operating Working Capital? – Examples with Formulas

Capital It is one of the most important elements in the world of finance and investment, which is why it is widely studied in specialized economic study centers. It is not for less, anyone who is starting in investments and its differences, must first have mastered what capital addresses.

Working capital, for its part, is one of these concepts within what is understood by capital that refers to the expectations, limits and risks that can be assumed by a new project.

It is a concept that is not limited to being only handled by the functions of financial institutions, since anyone can understand their types and formulas.

What is working capital?

Before covering informational terrain on the types of working capital, it is relevant to know what this term consists of.

Working capital can be understood as all financial resources available to a company or organization to carry out their daily tasks. In other words, it will be made up of various elements such as inventory, accounts receivable, and total cash.

people meeting at work table

The importance of working capital It is vital because it maintains a direct relationship with what will be the evolution of the business in entrepreneurship. This is so because without sufficient financial resources, the business will not be able to prosper over time.

What is net working capital? – Formula

The net working capital is the part that analyzes what is defined as liquidity of the company, having the ability to instantly meet the commitments that are acquired or arise unexpectedly. It should be viewed as a index that refers to the solidity that the company owns and its solvency.

Through net working capital, the level or quality of administrative management that a company is maintaining can easily be analyzed.

The formula for calculating net working capital it is summarized as follows, where CTN = Current Assets – Current Liabilities. If this formula results in a negative figure, it is understood that the financial situation of the company in question, in the short term, is seriously jeopardized to insolvency.

What is gross working capital? – Formula

The gross working capital It should be defined as the total cash and all cash equivalents that a business may have on hand. That is, it only refers to the current assets that the company owns.

Cash equivalents include all inventories, accounts receivable and investments, as well as marketable securities that can be settled.

person saving coins

The above also results in there being no formula for calculating gross working capital that is not limited to the sum of current assets. Being that CTB = All working capital.

What is operating working capital? – Formula

The last type of capital, the operating working capital, is focused on determining the relationship between the proportion of Current Assets and Current Liabilities that arises according to the activities carried out by the company.

Something that is taken into account when calculating this working capital is that withdraws both from Current Assets and Liabilities the accounts that would correspond to the cash management area. Using exclusively the accounts that would correspond to the daily operational activities of the company.

In this way, the formula for calculating operating working capital It is understood as: CTO = (Current Assets – cash and securities) – (Liabilities – Liabilities without Interest). Giving as a detail that if the figure obtained from this formula reflects a negative number, it is concluded that the company is developing a poor operational performance that may compromise the solvency of the company.

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