January 12, 2023

Types of Working Capital – Permanent Working Capital, Temporary Working Capital

The foremost crucial part of a company is its working capital, which reflects the liquidity a company has to manage its daily operations. Current liabilities are subtracted from current assets to determine working capital. Current Assets - Current Liabilities equals working capital.

A company strives to have positive working capital because it demonstrates its capacity to address immediate needs and preserve its dominant market position. Similar to this, a lack of working capital shows a company's inability to satisfy short-term obligations, which could affect operations.

Therefore, managing working capital is crucial to maintaining an appropriate level of funds that is neither excessive or insufficient.

Indian Working Capital Types

Based on revenue and frequency, a business must keep a variety of working capital. Let's look more closely.

Considering Value:

The investment made in a company's current assets, such as cash, accounts receivable, inventories, marketable securities, and short-term securities, is referred to as gross working capital.

Net-Working Capital:

This figure shows the surplus worth of current assets after current obligations have been subtracted from them. Here, current assets include cash, raw materials, inventories, and accounts receivable. Accounts payable are also included in current liabilities. Before making a working capital loan, lenders always take net-working capital into account.

working capital types

There are eight different kinds of working capital:

Gross working capital
Net working capital
Permanent working capital
Temporary working capital
Regular working capital
Reserve Margin working capital
Seasonal working capital
Special working capital

In this article, we are gonna discuss permanent and temporary working capital

The disparity here between a firm's assets is its working capital. Therefore, if you have enough working capital, you can effectively handle all of your company's short-term obligations and expenses. When there is enough operating capital, it is easier to handle financial emergencies.

The firm usually needs two main types of operating money to fund its activities according on periodicity:

1. Permanent working capital

2. Temporary working capital

This kind of working capital, commonly referred to as fixed working capital, remains consistent over the course of business activities. Companies must maintain this amount to cover their essential costs, such as paying rent and salaries, repaying creditors, etc. It is also called fixed working capital. Thus, the quantity to keep in your business depends on how big and how many employees you have.

Although the word "permanent working capital" has a wide range, its classification gives it a more specific meaning.

Regular Working Capital 

You can't avoid paying for some expenses in your firm. For instance, a manufacturing company will always need money to pay for processing raw materials. Regular operating capital is the very minimum needed to cover those kinds of costs.

Reserve Margin Working Capital

In any firm, unforeseen events may result in unexpected financial demands. Disasters caused by nature, modifications to governmental regulations, etc. For this, reserve margin working capital is used.

Reserve margin operating capital, however, is not always sufficient, especially in cases of extraordinary financial demands. If so, you might consider other financing options.

Temporary working capital

Additionally referred to as "variable, changing, or dynamic cash flow." The distinction between net working capital and permanent working capital is what we mean by this.

Its alternate name, variable working capital, refers to the additional funding a company needs over and above its permanent equivalent. It has to do with how much a corporation produces. Working capital needs may change throughout the year due to fluctuations in sales and output.

It can be classified into two types. 

These are:

Seasonal Capital

The season has a big impact on both production and sales. A corporation might record much strong revenue during certain seasons compared to the rest of the year. For instance, there will be huge demand during the holiday season if you manage a clothes firm. For such a requirement, you'll need seasonal working capital.

Special Variable Working Capital

Many firms use finance services like invoice discounting, bank loans, etc. because there is a significant cash outflow during these seasons for buying raw materials, paying distributors, etc.

It is the amount of cash a company needs to cover unusual debts, such as a sudden surge in demand for PPE kits. It can also involve starting an advertising campaign unexpectedly as a result of competitors' actions.


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