Classification Of Working Capital

Working capital can be classified into the following types:

1. Permanent Or Fixed Working Capital

Permanent working capital represents the current assets required on continuing basis over the entire year. A fixed amount of current assets are required to operate the business. Every business organization must maintain minimum current assets to ensure effective utilization of fixed facilities and for maintaining the circulating of current assets. Thus, minimum level of current assets is called is called permanent or fixed working capital. Permanent working capital or fixed working capital consists of minimum stock, minimum cash and bank balance and minimum other current assets. Generally, permanent working capital is financed by long-term sources of funds.

2. Temporary Or Variable Working Capital

Temporary working capital represents additional current assets required during the operation of the year. It is the extra working capital needed to support the changing production and sales activities of the firm. Any excess amount of working capital over the permanent working capital is called temporary working capital. It is required to meet the seasonal demands and contingencies. Temporary working capital is fluctuating, sometimes decreasing and sometimes increasing. Generally, temporary working capital is financed from short term sources of funds.