Working capital refers to the capital required for daily operations of a business. There are different types of working capital such as gross, net, and operating working capital. Working capital can be financed through both long-term and short-term sources. There are three main approaches to financing working capital - hedging, conservative, and aggressive. The hedging approach finances working capital based on the maturity of assets, while the conservative approach uses more long-term financing. The aggressive approach relies more on short-term financing for working capital.

1. WORKING CAPITAL MAAGEMENT
Arshad Islam; lecturer in Finance & Accounting; cell No: 0092-313-9911865, 331-9533187 Page 1
Every organization need a specific amount of capital for daily operations, such a capital is
called working capital. Organization needs to arrange a source of finance to arrange the
working capital. The arrangement of a sourceto finance the working capital is called
working capital management.
1) - Working Capital Terminologies:
There are certain words which are used in connection with working capital. Some of these
terminologies are as under:
1.1) - Gross Working Capital:
Working capital or gross working capital is the total of all the assets inside the organization.
If an organization has fixed and current assets, the working capital would be the total of the
entire asset is the organization. Since, the only sourceof working of organization is asset,
therefore all the asset all gross working capitals.
1.2) - Net Working Capital:
Net working capital is related to the total current assets and liabilities of the organizations. It
is the amount which is used in daily operations. Since the current workings are handling by
the assets other than liabilities therefore liabilities are offset from the assets. Net working
capital is:
NWC = Total Current Assets – Total Current Liabilities
1.3) - Net Operating Working Capital:
Operations are purchases, sales and productions. The amount of working capital used in
these three activities is known as operating working capital. These are the basic operations of
the organization, due to which, organization survives. Thus Net operating working capital is
more important than net working capital. NOWC is:
NOWC = Operating Current Assets – Operating Current Liabilities
1.4) - Fixed or Permanent Working Capital:
The amount of working capital used throughout the year is called fixed working capital. This
amount of working capital is used in both in on and off seasons of the business. This
working capital bears to relationship with demand for the productof the company because
this capital is of static use in business. For example the salaries of the peons have no
relationship with sales.
1.5) - Temporary Working Capital:
The amount of working capital used in on seasons only is called temporary working capital.
This WC has a great relationship with the demand of the productbecausethe more the
demand is the more will be the temporary working capital. Since, this working capital is only
for demand seasons therefore this capital is mostly financed by short-term finance sources.

2. WORKING CAPITAL MAAGEMENT
Arshad Islam; lecturer in Finance & Accounting; cell No: 0092-313-9911865, 331-9533187 Page 2
S.No Working Capital Formulae Use
1 Gross WC All the Assets
Operations + Non
Operations
2 Net WC Total CA – Total CL
Operations + Non
Operations
3 Operating WC
Operating CA – Operating
CL
Operations
4 Fixed WC All the years
5 Temporary WC Seasonal
2) - Current Assets/Working Capital Financing Policies:
Working capital can be finance from different sources. Commonly there are 2 sources, Long-
Term and Short-Term.
2.1) - Long-Term Source of Finance:
Long term sources are more than 5 years. The interest rates of these loans are comparatively
low due to inflation premium. The rate remains fix while the rate of inflation remains
persistent due to which the rate is comparatively low to the short term finance. The refinance
risk remains low as compare to the short term finance becauseof the credit availability.
2.2) - Short-Term Source Finance:
Short term sources are less than 5 years. The interest rates of these loans are comparatively
high because of the inflation premiums which are comparatively increases. The refinance
risk remains comparatively very high due to credit availability reasons. The source of capital
may not be available in future.
2.3) - Approaches to finance the working capital:
2.3.1) - Hedging/ Self-Liquidation/ Maturity Matching Approach:
This approachis based on the fact of “take what you need”. According to this approach, the
loan is taken on the basis of the maturity of assets. Fixed assets are long term requirement, so
they are financed from long-term sourceof finance. Similarly, fixed working capital is also
long-term so it is also finance through a long term sourceof finance. Temporary working

3. WORKING CAPITAL MAAGEMENT
Arshad Islam; lecturer in Finance & Accounting; cell No: 0092-313-9911865, 331-9533187 Page 3
capital is short term requirement; it is therefore finance from a short term source of finance.
Symbolically:
2.3.2) - Conservative Approach:
Conservative approach is mostly applied by the risk adverse people. According to this approach,
fixed assets are financed from long term loan because of continues usage. Fixed working capital is
also financed through long term debt but temporary working capital is 50% finance by long term
debt while the remaining 5% is financed through short term finance. As the risk of refinance is low
here therefore temporary source is also financed by long term to avoid the refinancing risk.
Symbolically:
2.3.3) - Aggressive Approach:
Aggressive approachis commonly applied by risk takers. According to this approach, fixed
assets are financed by long term loan. Temporary working capital is financed by short term
sourceof finance while fixed working capital is financed 50% by short term and 5% by long
term sourceof finance. As the requirement of working capital is permanent but it is working
capital of productionso it is also financed by short term becauseof limited production needs.

4. WORKING CAPITAL MAAGEMENT
Arshad Islam; lecturer in Finance & Accounting; cell No: 0092-313-9911865, 331-9533187 Page 4
The approached can also be understood through a matrix.
Hedging Approach
Conservative
Approach
Aggressive Approach
Fixed Assets Long-Term Finance Long-Term Finance Long-Term Finance
Permanent Working
Capital
Long-Term Finance Long-Term Finance
50% Long Term
50% Short Term
Temporary Working
Capital
Short-Term Finance
50% Short-Term
50% Long-Term
Short-Term Finance