3. WORKING CAPITAL
The capital of a business which is used in
its day-to-day trading operations,
calculated as the current assets minus the
current liabilities.
4.
5. On the basis of Balance sheet
1)Gross Working Capital (GWC):
Current assets in the balance sheet of a company are
known as gross working capital. Current assets are those short
term assets which can be converted into cash within a period of
one year. The grey area in the management of current assets or
gross working capital is its unpredictability
i.e. it is very difficult to ascertain the exact time of conversion of
such assets. Why is such a nature problematic? It is because the
liabilities occur at their time and do not wait for our current
asset to realize. This mismatch or the gap creates a need for
arranging working capital financing.
6. 2)Net Working Capital (NWC):
Net working capital is a very frequently used term.
There are two ways to understand networking capital.
First, one says it is simply the difference between curren
assets and the current liabilities on the balance sheet of
The other understanding discloses little deeper or hidde
meaning of the term.
As per that, NWC is that part of current assets which are
financed by long-term assets. Compared to gross worki
net working capital is considered more relevant
for effective working capital financing and management.
7. On the basis of Operating Cycle
1) Permanent / Fixed Working
Capital:
Dealing with current asset and fixed assets is totally
different. Determining the financing requirement in the case
of fixed assets is simply the cost of the asset.
Same is not true for current assets because the value of
current assets is constantly changing and it is difficult to
accurately forecast that value at any point of time.
To simplify the complexity to some extent, on the basis of
past trend and experience,
we can find a level below which current asset has never gone.
The current assets below this level are called permanent or
fixed working capital.
8. a)Regular Working Capital:
It is the permanent working
capital which is normally
required in the normal course of
business for the working capital
cycle to flow smoothly.
b)Reserve Working Capital: It is the working capital
available over and above the regular working capital. It
is kept for contingencies which may arise due to
unexpected situations.
9. 2)Temporary / Variable WC:
Temporary working capital is easy to understand after getting hold
over the permanent working capital. In simple terms, it is the difference
between net working capital and permanent working capital.
The main characteristic
which can be made out of the
example is "fluctuation”. The
temporary working capital,
therefore, cannot be forecasted.
In the interest of measurability,
this can be further bifurcated
as below which can create at least
some base to forecast.
10. a)Seasonal Working Capital: Seasonal working capital is t
temporary increase in working capital which is caused due to som
season for the business. It is applicable to businesses having the
seasons, for example, the manufacturer of sweaters for whom re
season is the winters. Normally, their working capital requirement
increase in that season due to higher sales in that period and the
go down as the collection from debtors is more than sales.
b)Special Working Capital: Special working capital is that rise in
temporary working capital which occurs due to a special event wh
otherwise normally does not take place. It has no basis to forecas
rare occurrence normally.
For example, a country where Olympic Games are held, all the b
require extra working capital due to a sudden rise in business act
