Classification of working capital

Classification of working capital

1. CLASSIFICATION OF WORKING CAPITAL PRESENTED BY: ALEENA CHACKOCHAN MACFAST

2. WORKING CAPITAL Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.

3. TYPES OF WORKING CAPITAL WORKING CAPITAL BASIS OF CONCEPT BASIS OF TIME Gross Working Capital Net Working Capital Permanent / Fixed WC Temporary / Variable WC Special WC Seasonal WC

4. GROSS WORKING CAPITAL Gross working capital require that a firm have adequate investment in current assets and proper management of theses asset. It should be neither excessive nor inadequate asset. If there are surplus funds they should be immediately invested, and if the funds become low and the requirement is greater the financial manager should be able to get the required finance so that the commitments of the firm can be made short notice.

5. NET WORKING CAPITAL It is the difference between current asset and current liabilities. When current asset are higher than current liability NWC will be positive, but if current liabilities exceed current assets NWC. The current asset should as a rule maintain a ratio of 2:1 with current liabilities. NWC explain the management of financing of working capital through the financing of long-term and short term funds. NWC= Current Assets – Current Liabilities CA= cash + marketable securities + accounting receivables + notes and Bills Receivables + Inventories CL = Accounts Payable + Notes and Bills + Outstanding Expenses + Short Term Loans.

6. Difference between Net Working capital and Gross working capital Net Working Capital Gross Working Capital NWC is the concept of qualitative nature. It is indicating the firm’s ability to meet its operating expenses and current liability. It expressed as current asset minus current liability. It is concept very popular in accounting system. Net concept suitable for sole trader and partnership firms. It is very useful to find out true the financial position of a company. Increase in bank loan cannot increase working capital. Retained profits, sale of fixed assets will increase net working capital. GWC is the concept of quantitative nature. It is pointing out the total amount available for financing the current assets. It indicating the total sum of current assets. It is a concept very popular in financial management. Gross concept suitable for companies. It cannot reveal the true financial position of a company. Every increase in borrowing will increase the gross working capital. Under net concept, no change in working capital.

7. PERMANENT OR REGULAR WORKING CAPITAL Permanent working capital is the minimum level of current assets which is continuously required by a firm for carrying out its business activities and that cannot be converted into cash in normal course of business. Permanent working capital is either constant or it increase with the size of the business or its scale of operations . Charactertics : Continue to exist for a longer period of time is the business activities. Constantly changes in the business from one asset to another. Grows the size or volume of business operation.

8. T EMPORARY OR VARIABLE WORKING CAPITAL Any amount over and above the permanent level of working capital is temporary working capital. It keeps on fluctuating from time to time as per the changes in production and sales activities . Charactertics : It is an extra working capital needed to changing production and sales activities. It is created to meet liquidity requirements. It fluctuates according to the level of operations.

9. Temporary working capital is fluctuating during the operating period . It is needed for shorter period. Two types of temporary working capital Seasonal working capital . Specific working capital.

10. SEASONAL WORKING CAPITAL The capital required to meet the seasonal demands of the enterprise is called seasonal working capital. For example, a manufacture of woolen textiles, refrigerators or coolers may need extra funds to carry on production and to accumulate stock before the sales operations. Seasonal working capital being of short-term nature, it has to be financed from short-term sources like bank loan etc.

11. SPECIFIC WORKING CAPITAL Specific working capital is that part of working capital which is required to meet unforeseen contingencies like slump, strike, flood, war etc. A dditional working capital is to be arranged to meet special exigencies such as launching of extensive marketing campaign, purchase of goods for stock in view of future increase in price etc.

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