Explain Types of working capital

Explain Types of working capital.

Ans:   Working capital is broadly classified into two-permanent working capital nd variable working capital.

1.      Permanent Working Capital

There is always a minimum amount of working capital which is continuously required by the enterprise to carry out its normal business operations. This is usually called as permanent or fixed working capital. Thus, fixed working capital is the minimum amount of working capital required to ensure effective use of fixed assets and support the normal business operation. It is that part of capital which is permanently blocked in current assets.

Permanent working capital is divided into two-initial working capital and regular working capital.

(a)     Initial working capital:

The working capital which is needed in the initial stage of project is called initial working capital. It is the capital with which the project is started.

(b)     Regular Working Capital:

It is the amount needed for continuous operation of the project. It is the amount of working capital required after the project has been established as a going concern. It is the minimum amount of the liquid capital to keep up the circulating capital from cash to inventories, to receivables and back again to cash.

2.      Variable Working Capital

It is the working capital which varies with volume of business. This is the additional capital needed to meet seasonal and special needs. Variable working capital is divided into seasonal working capital and special working capital.

(a)     Seasonal Working Capital:

It is the working capital which is needed during the particular season. It is the additional working capital required during busy seasons.

(b)     Special Working Capital:

It is the extra working capital to be maintained to meet unforeseen contingencies or to finance special operations. It may be required to carry on a special sales campaign financing slow moving stock or financing a period of strike, lock out, etc.