Types of working capital

A company or business entity requires funds for their daily operations. This type of fund is invested in inventories that include the raw materials, finish goods, spare parts and some credit extension to debtors. Working capital in divided in various types based on the operating cycle of the company and the balance sheets.

The permanent working capital

This is popularly known as the fixed working capital. The tendon committee has given this working capital a third definition, which is the hard core working capital. The permanent working capital is the main investment for all the company resources that are used for any business activities.  The features of a permanent working capital include a positive correlation between the size of the business and the fixed working capital. a long term permanent source of funds that are used for the fixed working capital and a constant gross of the fixed working capital.

Determining the requirements of this type of working capital is not hard. The capital is simply the costs of the assets. It may not be true for current assets because their value is constantly changing.

The temporary working capital

This type of working capital is also called the fluctuating or variable work capital. This type of work capital has a close and prevailing relationship with the production levels and the sales.  The sale and production levels are not constant throughout the year. When a company receives a large production order and there are countless credit sales, you will need more temporary capital. This type of capital is required when there is production and anticipation for future demands.

The gross working capital

This simply describes the total amount of your company’s assets. some of the things that fall under the gross working capital include the accounts receivable, the inventory, cash on hand and the short term investments.  When calculating the gross working capital, liabilities are not included. This working capital offers a minimal or limited description of your company’s finances.

 The net working capital

This is more accurate and complete when compared to the gross working capital. it measures the liquidity health of your company. The net working capital is calculated by adding all the firms’ current assets and removing all the liabilities. Common assets include the long term and short term investments, inventory and accounts receivable. Some common examples of liabilities are the customer deposits account payables, interest payables and taxes. They can accumulate within on year depending on the company’s condition

The negative work capital

They are when your company’s current liabilities surpass the assets.  the negative work capital is a symbol  of additional capital that will be needed to run your business when it is closed.  The ratio of 1 to 1.5 means that there is more than one dollar of asset for every existing liability.  The negative work capital assures the consumers that your company can still generate cash over the short term to cover for payrolls and supply obligations.

The reserve work capital

This is part of the subscribed or uncalled capital.  It will not be called out unless your company goes into liquidation. This portion of the capital reserves will only be used when the mentioned event happens.