Net Working Capital vs. Gross Working Capital

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Net Working Capital vs. Gross Working Capital
Mohd. Faisal, Member
Working Capital is a measurement of SHORT-TERM LIQUIDITY of a business enterprise.

Mathematically it is calculated by subtracting current liabilities from current assets of the business enterprise. The concept of working capital is of immense importance from the point of view of controlling and decision making.

In a business organisation, normally the contribution of investments in current assets is made by the owner of the business and by outsiders like suppliers of raw materials in the form of short-term liabilities for a short period.

The TOTAL contribution made in current assets by both owner of the business and these outsiders is called "Gross Working Capital", while the contribution by the OWNER of the business alone is called: "Net Working Capital".

For many decisions, you need to know the contribution that was made in current assets by the owner of the business. The concept of net working capital is also very useful in ratio analysis, as a decision support tool. 18-7-2018



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