CLASSIFICATION OFWORKING CAPITAL PRESENTED BY: ALEENA CHACKOCHAN MACFAST
WORKING CAPITAL Working Capital refers to that part of the firm’scapital, which is required for financing short-term orcurrent assets such as cash marketable securities, debtorsand inventories. Funds thus, invested in current assetskeep revolving fast and are constantly converted into cashand this cash flow out again in exchange for other currentassets. Working Capital is also known as revolving orcirculating capital or short-term capital.
TYPES OF WORKING CAPITAL WORKING CAPITAL BASIS OF BASIS OF CONCEPT TIME Gross Net Permanent Temporary Working Working / Fixed / Variable Capital Capital WC WC Seasonal Special WC WC
GROSS WORKING CAPITAL Gross working capital require that a firm haveadequate investment in current assets and propermanagement of theses asset. It should be neither excessive nor inadequate asset.If there are surplus funds they should be immediatelyinvested, and if the funds become low and therequirement is greater the financial manager should beable to get the required finance so that the commitments ofthe firm can be made short notice.
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.
DIFFERENCE BETWEEN NET WORKING CAPITAL AND GROSS WORKING CAPITAL Net Working Capital Gross Working Capital1. NWC is the concept of qualitative 1. GWC is the concept of quantitative nature. nature.2. It is indicating the firm’s ability to meet 2. It is pointing out the total amount its operating expenses and current available for financing the current liability. assets.3. It expressed as current asset minus current liability. 3. It indicating the total sum of current4. It is concept very popular in accounting assets. system. 4. It is a concept very popular in financial5. Net concept suitable for sole trader management. and partnership firms. 5. Gross concept suitable for companies.6. It is very useful to find out true the financial position of a company. 6. It cannot reveal the true financial7. Increase in bank loan cannot increase position of a company. working capital. Retained profits, sale of 7. Every increase in borrowing will fixed assets will increase net working increase the gross working capital. capital. Under net concept, no change in
PERMANENT OR REGULAR WORKING CAPITAL Permanent working capital is the minimum levelof current assets which is continuously required by a firmfor carrying out its business activities and that cannot beconverted into cash in normal course of business. Permanent working capital is either constant or itincrease with the size of the business or its scale ofoperations.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.
TEMPORARY OR VARIABLE WORKING CAPITAL Any amount over and above the permanent level ofworking capital is temporary working capital. It keeps onfluctuating from time to time as per the changes inproduction 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.
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.
SEASONAL WORKING CAPITAL The capital required to meet the seasonaldemands of the enterprise is called seasonal workingcapital. For example, a manufacture of woolen textiles,refrigerators or coolers may need extra funds to carry onproduction and to accumulate stock before the salesoperations. Seasonal working capital being of short-termnature, it has to be financed from short-term sources likebank loan etc.
SPECIFIC WORKING CAPITAL Specific working capital is that part of workingcapital which is required to meet unforeseen contingencieslike slump, strike, flood, war etc. Additional working capital is to be arranged tomeet special exigencies such as launching of extensivemarketing campaign, purchase of goods for stock in viewof future increase in price etc.