The need for various types of working capital to fund the operation of the business is important for the operating cycle of to run smoothly. The raw materials, inventory, spares, finished goods are ways in which working capital is utilized which are imperative to keep the efficient way to manage the creditworthiness of the business and manage the debtors.
Different Types of Working Capital
As a business and the how good is the liquidity ratio, can be ascertained from the balance sheet view and understand the underlying requirements are important:
- Gross working Capital-the short-term assets that can be converted to cash easily within a short span of time, usually, a year is termed as current assets which are the gross working capital of the business. It is important to have a mechanism and understanding the point at which it can be converted else there is a gap created between the current assets to be realized and the liabilities which are more or less ascertained without any ambiguity
- Net Working Capital– the effective way in which a current asset can be financed by long-term assets are referred as the Networking Capital which is a little more insight on the components to determine the actual requirements of financing the business both the long term and short term financing requirements. Based on the immediate financing requirements and the asset available for the disposal is an effective way to meet the need for working capital.
For any business operation, whether it is a small scale of operation or large, the efficient way to fund the business is quite challenging in today’s uncertain times and volatile situations. Based on the business requirements, nature could differ from a
- Permanent or Fixed Working capital– This amount of cash and equivalents’ are required on a regular or daily basis to fund in, and run the business efficiently as they come into the operating cycle of the business. This amount could be kept for the daily operation or to fund in and kept as a reserve to meet any contingent requirement. As the value of the fixed asset and current asset vary, due to nature and funding method, the constant manner of every business to keep the fixed assets intact and fund the business based on the current assets value which varies, is imperative
- Variable or Temporary Working Capital – it is often determined as the difference between the net working capital and permanent working capital, which is the fluctuations based on the requirement of the business which could be funded by external financing, an effective debt management as and when the need arises.