Q.What do you mean by working capital? Distinguish between gross working capital and net working capital.

Working capital is the fund a business keeps invested in its short-term operations to finance its day-to-day activities and bridge the gap between paying for inputs and collecting cash from customers.

Gross working capital measures the total investment in current assets, while net working capital measures short-term liquidity and can be positive or negative depending on whether current assets exceed current liabilities.

Meaning of working capital. Working capital is the amount of funds a business must keep invested in its short-term (current) operations — buying stock, allowing credit to customers, and holding cash — so that its day-to-day activities can be carried on smoothly. It bridges the time gap between spending cash on inputs (stock, wages, expenses) and finally receiving cash from the sale of goods. Without adequate working capital, even a firm with valuable fixed assets cannot function, because it would be unable to buy stock or meet its running expenses.

Distinction between gross and net working capital.

Gross working capital takes a quantitative view — it simply totals the firm's investment in stock, debtors, bills receivable, short-term investments, prepaid expenses and cash. Net working capital takes a qualitative, liquidity-focused view — it shows how much of the current assets is financed by the firm's own long-term funds rather than by short-term creditors. A positive net working capital indicates the firm can comfortably meet its short-term obligations; a negative figure is a warning sign.

Students often give only one concept (usually net working capital) and forget that gross working capital is a separate, equally valid concept. Another slip is describing gross working capital as 'current assets minus current liabilities' — that is net, not gross; gross working capital is the total of current assets alone.