Gross and Net working capital
On the basis of gross concept, working capital refers to the total amount invested in the current assets. Current assets are those assets of the company which can be converted into cash within one year. The business organization may have various types of current assets such as checking accounts, temporary investment, account receivables, debtors, inventories, cash at bank, cash on hand etc. And the gross working capital is calculated by adding all the items of current assets. Symbolically,
Gross working capital = ∑(current assets)
= Account Receivables + Debtors + Cash on hand + Cash at bank + Inventories + Prepaid expenses + ……………...
On the other hand, net concept states that working capital is the difference between total current assets and total current liabilities. Here current liabilities refer to the short-term liabilities of the company which should be payable within one year. Some of the current liabilities are Account payables, advance incomes, creditors, short-term loans, outstanding expenses, interest payables, bank overdrafts, accrued expenses etc. It says that working capital is calculated by deducting the total current liabilities form the total current assets. It can be represented by the following formula:
Net Working Capital = Total current assets – total current liabilities
Permanent and Temporary working capital
Every business organization maintain certain fixed amount of capital as a security to operate the day to day business activities smoothly without any interruption which is termed as permanent working capital. If the company has a policy to maintain $50000 capital each day irrespective of the daily requirement then it will be the fixed working capital for the company. There are two types of permanent working capital: regular working capital and reserve working capital.
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