Classification/Types of Working Capital
Working capital may be classified in two types:
1. On the basis of concept:
- Gross Working Capital:
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.
ii.Net Working Capital:
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 current assets and the current liabilities on the balance sheet of a business. The other understanding discloses little deeper or hidden meaning of the term. As per that, NWC is that part of current assets which are indirectly financed by long-term assets. Compared to gross working capital, net working capital is considered more relevant for effective working capital financing and management.
2. On the basis of time:
i. Permanent working capital: it is also called fixed working capital. It means to carry on the day to day expenses the firm is required to maintain the minimum amount of working capital. For example the firm is required to maintain the minimum level of raw material, finished goods or cash balance etc.
a) Regular working capital- it means the minimum amount which the firm has to keep with itself to carry on the day to day operation.
b) Reserve working capital- it means the excess amount over the regular working capital for uncertain circumstances like strike, lock out, depression etc.
ii. Temporary working capital: it is also called variable working capital, which is required to meet the seasonal demands as well as for special purposes.
a) Seasonal working capital- it is required to meet the seasonal needs of the enterprise.
b) Special working capital- it is required for some special purposes of the enterprise. For example advertising the product of the firm requires special working capital.Temporary working capital is for short period and fluctuates while permanent working capital is stable and fixed.