Gross Working Capital

First off, a couple quick definitions. Assets are things that give a company value. Money in the bank. Machines they can sell. The land on which the factory is built. Basically anything that can get turned into cash.

Meanwhile, liabilities represent the money a company owes. Bank loans. Bonds it has outstanding. The money it still owes the caterer for the 2015 Christmas party.

One last distinction to worry about...assets and liabilities come in two categories: current and long-term.

Current assets and current liabilities are the short-term variety. Current assets are the liquid assets that can bring in cash right away. Money in the bank account, etc. Current liabilities represent the debts you owe right now. So...not the 30-year mortgage on the factory...but that caterer is starting to say scary things about catching people in dark alleys. That bill is becoming a very current liability.

All right...on to working capital.

Gross working capital equals current assets. It includes the money in the bank, accounts receivable (the money clients owe the company), and securities that can get sold easily (stocks, tradeable bonds, etc.). You ignore the long-term assets in this equation. You aren't going to sell your factory to pay that catering bill, so it doesn't factor into things.

Gross working capital measures a company's near-term financial wherewithal: its ability to pay its immediate bills.

Meanwhile, there's a separate measure called net working capital. To calculate net working capital, you start with current assets, then you subtract current liabilities. It gives you the amount of money available once you pay your short-term debts, i.e. how much is left after you pay the caterer.