Wednesday, 20 July 2011

Types of Working Capital

Greetings to fellow blog readers......


There are two types of working capital. They are:
I) on the basis of concept
1) Gross working capital.
2) Net working capital.

1. Gross working capital
           Refers to the firm’s investment in current assets are the assets, which can be concerned into and with in an accounting year (or operating cycle) and include cash, short-term securities, debtors (accounts receivables or book debts) bills receivable and stock (inventory) Gross working capitals points to the arranging of funds to finance current assets.
           Refers to the difference between current assets and current liabilities. Currents liabilities are those claims of outsiders, which are expected to nature for payment within accounting years and include creditors (accounts payable). Bills Payable and outstanding expenses. Networking capital can be positive or negative. A positive networking capital will arise when current assets, exceed current liabilities and a negative working capital will arise when current liabilities are in excess of current assets.
II) On the basis of time
1) Permanent/fixed/fluctuating working capital
2) Temporary working capital
1) Permanent working capital:-
            The need for current assets arises because of the operating cycle. The operating cycle is a continuous process and therefore, the need for the current assets is felt constantly. But the magnitude of current assets needed is not always a minimum level of current assets, which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent or fixed working capital.
EXAMPLE: - Every firm has to maintain a minimum level of raw materials, work-in-progress, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of capital is permanently blocked in current assets. As the business grows, the requirements of permanent working capital also increase due to the increase in current assets.
2. Temporary working capital:-
          Depending upon the changes in production and sales, the need for working capital over and above permanent working capital, will have in be maintained to support the peak proceeds of sale and investment in receive may also increase during such periods. On the other hand, investment in raw material, working in progress and finished goods will fall if the market is slack.
            The extra working capital needed to support the changing production and sales activities is called fluctuating, or variable or temporary working capital. The firm to meet liquidity measurement that will last only temporarily creates temporary working capital.


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