Permanent and temporary working capital
There are 2 types of working capital. These are described below:
a) Permanent Working capital and
b) Temporary Working capital.
1. Permanent Working capital
Permanent working capital consider to the minimum amount of all current assets that is needed at all times to ensure a minimum level of uninterrupted business operations. A few minimum amounts of raw materials, work-in-progress (WIP), bank balance, finished goods etc., a business has to take all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is considered to as core working capital or core current assets. But the level of core current assets is not a constant sum at all the times. For a business that is growing fastly the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will approximately remain the same with few variations. Thus, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital being a permanent investment needs to be financed via long-term funds.
2. Temporary Working capital
The temporary or varying working capital changes with the volume of operations. It fluctuates along with the scale of operations. This is the additional working capital needed from time to time over and above the permanent or fixed working capital. During seasons, more production/sales occur resulting in larger working capital needs. The reverse is true during off-seasons. As seasons change, temporary working capital requirement moves up & down. Temporary working capital can be financed by the short term funds like current liabilities. While the level of temporary working capital moves up, the business might employ short-term funds and while the level for temporary working capital recedes, the business may retire the short-term loans of it.