Gross working capital is the total cash, and cash equivalents, that a business has on-hand. Cash equivalents may include inventory, accounts receivable, and investments, such as marketable securities, which may be liquidated within the calendar year. This may also be known as current assets or circulating capital.
A business requires cash to start, so that it may purchase property, inventory, and hire employees. The company then uses its employees to sell the goods and generate more cash. This money is then converted into more inventory and also serves to pay for the location and employees' salaries. This continuous conversion of corporate assets — comprised, in this example, of the inventory, offices, and employees — is known as working capital.
Two types of working capital exist — gross and net. Gross working capital generally deals with all corporate assets. Net working capital is the amount of assets or cash that remain after subtracting a company’s liabilities from its total current assets. Liabilities can include all of the debt owed by a company that must be paid within one year, such as accruals and accounts payable.
The goal of a company is to become profitable to its owners and shareholders. This happens when the amount of the gross working capital exceeds the amount of current liabilities. This is referred to as positive net working capital. Negative net working capital occurs when the reverse is true, and the liabilities exceed the assets.
A business' balance sheet will typically show the amount of cash invested in current assets and the amount of cash tied up in current liabilities. Balancing these two amounts is commonly the responsibility of a corporate financial manager. This job is known as short-term financial management.
A company must consider its cash inflow when evaluating its total gross working capital. Cash inflow refers to how quickly any aspect of the current assets, such as the inventory and marketable securities, can be converted into liquid cash. These funds are then used to pay corporate bills when they come due.
Cash inflow is typically somewhat unpredictable due to its dependence on the various markets in which corporate goods are sold. This unpredictability requires most companies to maintain a much higher gross working capital than current liabilities, to ensure that all bills will be paid in a timely manner. After a certain period of time, operational costs may be re-evaluated and cash inflow more reasonably predicted, allowing a company to maintain a lower level of current assets on hand.