Types of Working Capital

Working capital are of various types. They are explained as follows.

Types of working capital

1. Permanent Working Capital

It is otherwise called as Fixed Working Capital. Tandon committee has referred to this type of working capital as Hard Core Working Capital.

Permanent working capital implies the base investment amount in all types of current resources which is respected at all times to carry on business activities. The value of current assets have been increased or decreased over a period of time. Even though, there is a need of having minimum level of current assets at all times in order to carry on the business activities effectively.

Features of Permanent Working Capital

a) The gross value of permanent working capital remain constant but the value of components of current assets is differing from each other.

b) There is a positive correlation between the size of business and the amount of permanent working capital.

c) Only long term sources of funds are used for permanent working capital.

2. Temporary Working Capital

It is otherwise called as Fluctuating or Variable Working Capital. There is a close relationship prevailing between temporary working capital and the level of production and sales. There is no uniform production and sales throughout the year. If heavy order is received for production and there is a large amount of credit sales, there is a need of more amount of temporary working capital. At the same time, if production is carried on in anticipation of demand in near future, temporary working capital is required.

In nutshell, temporary working capital is an extra working capital required to support the changing production and sales activities.

3. Gross & Net Working Capital

Discussed in previous article here Gross & Net Working Capital.

4. Negative Working Capital

Sometimes, the value of current assets is less than the current liabilities, it shows negative working capital. If such type of situation arise, the firm is going to meet the financial crisis very shortly.

5. Reserve Working Capital

It is otherwise called as Cushion Working Capital. It refers to the short term financial arrangement made by the business units to meet uncertain changes or to meet uncertainties. A firm is always working with the expectation of some risks which may be controllable or uncontrollable. The reserve working capital can be used in order to meet the uncontrollable risks and sustain in the business world.

6. Regular Working Capital

The minimum amount of working capital to be maintained in normal condition is called Regular Working Capital.

7. Seasonal Working Capital

Some products have seasonal demand. Seasonal demand arises due to festival. In this way, seasonal working capital means an amount of working capital maintained to meet the seasonal demand of the product.

8. Special Working Capital

Special programmes may be conducted for business development. The programmes may be advertisement campaign, sales promotion activities, product development activities, marketing research activities, launching of new products, expansion of markets and the like. Therefore, special working capital means an amount of working capital maintained to meet the expenses of special programmes of the company.