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Types of Working Capital -Temporary Working Capital, Permanent Working Capital

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Working capital is the RAM of your business that keeps your operational system running faster and smoother. As much as working capital does for your business, it also contains different types, which can be useful during various stages of your business activities.

Different Types of Working Capital:

1. Operational Capital – Operational Capital has been split into temporary working-capital and permanent working-capital. Which is based on the operating cycle as well as a balance sheet.

    • Temporary Working Capital:- It is also known as fluctuating or variable working-capital. After understanding permanent working-capital it is very easy to understand the term temporary working-capital. There is a close relationship between the level of production and sales of temporary working-capital. There is no uniform production & sales throughout the year. If a large order is received for production and a large amount of debt is sold, then a greater amount of temporary working-capital is required. At the same time, if production is done in anticipation of demand in the near future, you need a temporary working-capital.

      • Regular Working-Capital:- This type of working-capital is the minimum working capital that a business defines as the capital required for the day-to-day operations of its business. We need businesses to maintain a reasonable level of regular working-capital for stable operations. It is normally required in the normal course of business to ensure the smooth flow of the working-capital cycle. Examples include payment of salaries and wages and overhead expenses for processing raw materials, etc.

      • Reserve Margin Working-Capital:- It is also known as the cushion working-capital. It is a type of fund that is held above the business working-capital. Traders use such funds as a contingency for unforeseen market conditions or opportunities. It refers to the short-term financial arrangements made by your business units to meet uncertainties. A firm is always operating with the expectation of certain risks that may ever be controllable or uncontrollable. Reserve working-capital can be used to meet uncontrollable risks in the world and to sustain its business.

  • Permanent Working Capital:- We also know this as Fixed or Hard Core Working Capital. It means the base capital/investment money required at all times to continue business activities. Permanent working-capital refers to the base investment amount in all types of current resources, provided for carrying out business activities at all times. The valuation of all current assets increases and decreases over time. However, minimum running assets are required at all times to run business activities efficiently.

    • Seasonal Variable Working Capital:- This working capital refers to the working-capital that the business requires every year during the season. Businesses that work in the production or manufacture of products or provide all services that have seasonal demand have to maintain seasonal working-capital. It can be considered as reserve working capital but only to adapt to sudden changes in the market and seasonal fluctuations.

Seasonal working-capital is considered as its temporary increase in working capital. This only applies to businesses that have weather effects, For example, manufacturers of raincoats and umbrellas for which the relevant weather is monsoon, woolen clothes for which the relevant weather is winter, etc.

    • Special Variable Working Capital:- Many special programs can also be undertaken for business development. The event can be advertising campaigns, advertising strategy, system development work, marketing research strategy, setting up the latest business, expanding markets, and many more. Unique working capital is the fact that a sudden simultaneous increase in short-term working-capital is due to a special occasion. 

2. Gross Working-Capital:- The balance sheet is popularly known as gross working capital for reporting the firm’s current assets. Current assets are short-term assets that can be easily converted into cash within a year of the deadline. Gross working-capital is the total assets of the company. These assets are basically those that we can convert into cash within a year. Assets typically include cash, receivables, marketable securities such as stocks, short-term investments, etc.

3. Net Working-Capital:- Net working capital is the most commonly used capital among companies. There are two ways to get networking capital which are explained to you here. The first way is, you can only find net working-capital by finding the difference in current assets on current liabilities from the business sheet. The second way is that networking capital is a subset of current assets that are informally financed by long-term assets. Networking capital is the most important type of working capital for management decisions on working-capital financing.

4. Negative Working-Capital:- Negative working-capital means that, sometimes, the value of current assets is less than current liabilities, which shows you negative working-capital. When that type of situation arises, it indicates that your business is going to face a financial crisis very soon. A proper plan for its management should be a proper plan for managing its financial crisis.

5. Positive Working-Capital:- It means a type of working-capital where current assets exceed current liabilities. Current liabilities mean payments within one year within the standard course of business or possibly less than current assets payable from the revenue income of this business.

# Difference between Permanent and Temporary working capital

BasisPermanent Working CapitalTemporary Working Capital
MeaningPermanent working capital refers to the level of current assets that have to be maintained and are important for the firm to run its business regardless of the level of operations.Temporary working capital refers to the working capital which is over & above the permanent working capital. It is necessary to meet seasonal needs and temporary needs.
Also known asFixed or Hard Core Working CapitalFluctuating or variable working-capital
PeriodFor Long termFor Short term
UsedUsed for fixed assets.Used for temporary or seasonal needs.
NaturePermanent working capital is stable Temporary working capital fluctuates i.e. sometimes increasing and sometimes decreasing.
FundNeed to keep regular funds for day to day workTemporary fund for seasonal works only
Needed at timesPermanent working capital will always be the reserve capital for uncertain situations like lockout, strike, or depression.Temporary working capital will be only for special needs like advertising of a product etc.

Conclusion:

It was all about different types of working capital. We need to balance this with various working-capital methods, techniques, ideas, and strategies. This will definitely help you to effectively manage any type of working capital that each and every single business may need from time to time.

We hope this information will help you to understand the types of Working-Capital Management. You can read more about working capital management here: What is Working Capital Management? Importance, Components, and Benefits



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