Financial and Strategic Management

What are the Types of Working Capital?

The working capital may be classified into the following kinds.

1. Initial working capital: The capital, which is required at the time of the commencement of business, is called initial working capital. These are the promotion expenses incurred at the earliest stage of the formation of the enterprise which include the incorporation fees, attorney’s fees, office expenses, and other preliminary expenses.

2. Regular working capital: This type of working capital remains invested in the enterprise for the successful operation. It supplies the funds necessary to meet the current working expenses i.e. for purchasing raw material and supplies, payment of wages, salaries, and other sundry expenses.

3. Fluctuating working capital: This capital is needed to meet the seasonal requirements of the business. It is used to raise the volume of production by the improvement or extension of machinery. It may be secured from a financial institution which can, of course, be met with short-term capital. It is also called variable working capital.

4. Reserve margin working capital: It represents the amount utilized at the time of contingencies. These unpleasant events may occur at any time in the running life of the business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and unavoidable competition, etc. In this case, a greater amount of capital is required for the maintenance of the business.

5. Permanent and Temporary Working Capital: The Operating Cycle creates the need for Current Assets (Working Capital). However, the need does not come to an end once the cycle is completed. It continues to exist. To explain the continuing need for current assets, a distinction should be drawn between temporary and permanent working capital.

6. Long Term working capital: The long-term working capital represents the number of funds needed to keep a company running in order to satisfy demand at the lowest point. There may be many situations where demand may fluctuate considerably. It is not possible to retrench the workforce or instantly sell all the inventories whenever demand declines due to temporary reasons. Therefore the value, which represents the long-term working capital, stays with the business process all the time. It is for all practical purposes known as permanently fixed assets. In other words, it consists of the minimum current assets to be maintained at all times. The size of the permanent working capital varies directly with the size of the Operation of a firm.

7. Short term working capital: Short-term capital varies directly with the level of activity achieved by a company. The Volume of Operation decides the quantum of Short-term working capital. It also changes from one form to another; from cash to inventory, from inventory to debtors, and from debtors back to cash. It may not always be gainfully employed. Temporary Working capital should be obtained from such sources, which will allow its return when it is not in use.

8. Gross Working Capital: Gross working capital refers to the firm’s investment in current assets. Current assets are those assets that can be converted into cash within an accounting year and includes cash, short-term securities, debtors bills receivable, and stock.

9. Net Working Capital: Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within the accounting year and include creditors, bills payable, and outstanding expenses. Net Working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities.

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Shreya Kushwaha

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