-->

WORKING CAPITAL MANAGEMENT ( CLASSIFICATION OF WORKING CAPITAL )

Also Read

 


Working Capital is classified as :

(a)                           On the basis of concept 

q  Gross Working Capital

                   Refers to the firm’s investment in current assets. Current assets are the assets that can be converted into cash within an accounting the year and include cash, short-term securities, debtors, bills receivable and stock.

q  Networking Capital :

                   Refers to the difference between the current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors, bills payable, and outstanding expenses. Networking capital can be positive or negative.  A positive networking Capital will arise when current assets exceed current liabilities. A negative networking capital occurs when current liabilities are in excess of current assets.

(b)                          On the basis of time

q  Permanent or Fixed Working Capital :

                   Permanent or Fixed working capital is the minimum amount that is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. It also refers to the Hard core working capital. There is always a minimum level of current assets which is continuously required by the enterprise to carry out its normal business operations. For example, every firm has to maintain a minimum level of raw material, work-in-process, 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.

The permanent working capital can be further be classified as:

(a)     Regular Working Capital

(b)    Reserve Working Capital

                   Regular working capital required to ensure circulation of current assets from cash to inventories, from inventories to receivables and from receivables to cash and so on.

                   Reserve working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies that may arise at unstated periods such as strikes, the rise in prices, depression, etc.

q  Temporary Or variable Working Capital :

                   Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as seasonal working capital and special needs. The capital required to meet the seasonal needs of the enterprise are called seasonal working capital.

                   Special working capital is that part of working capital which is required to meet special exigencies such as the launching of extensive marketing campaigns for conducting research, etc.

Close