CLASSIFICATION OF

WORKING CAPITAL

PRESENTED BY:

ALEENA CHACKOCHAN

MACFAST

WORKING CAPITAL

Working Capital refers to that part of the firm’s

capital, which is required for financing short-term or

current assets such as cash marketable securities, debtors

and inventories. Funds thus, invested in current assets

keep revolving fast and are constantly converted into cash

and this cash flow out again in exchange for other current

assets. Working Capital is also known as revolving or

circulating capital or short-term capital.

TYPES OF WORKING CAPITAL

WORKING CAPITAL

BASIS OF

CONCEPT

BASIS OF

TIME

Gross

Working

Capital

Net

Working

Capital

Permanent

/ Fixed

WC

Temporary

/ Variable

WC

Special

WC

Seasonal

WC

GROSS WORKING CAPITAL

Gross working capital require that a firm have

adequate investment in current assets and proper

management of theses asset.

It should be neither excessive nor inadequate asset.

If there are surplus funds they should be immediately

invested, and if the funds become low and the

requirement is greater the financial manager should be

able to get the required finance so that the commitments of

the 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 Capital

1. NWC is the concept of qualitative

nature.

2. It is indicating the firm’s ability to meet

its operating expenses and current

liability.

3. It expressed as current asset minus

current liability.

4. It is concept very popular in accounting

system.

5. Net concept suitable for sole trader

and partnership firms.

6. It is very useful to find out true the

financial position of a company.

7. Increase in bank loan cannot increase

working capital. Retained profits, sale of

fixed assets will increase net working

capital.

1. GWC is the concept of quantitative

nature.

2. It is pointing out the total amount

available for financing the current

assets.

3. It indicating the total sum of current

assets.

4. It is a concept very popular in financial

management.

5. Gross concept suitable for companies.

6. It cannot reveal the true financial

position of a company.

7. Every increase in borrowing will

increase the gross working capital.

Under net concept, no change in

working capital.

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 thebusiness activities.

Constantly changes in the business from one asset toanother.

Grows the size or volume of business operation.

TEMPORARY OR VARIABLE

WORKING CAPITAL

Any amount over and above the permanent level of

working capital is temporary working capital. It keeps on

fluctuating from time to time as per the changes in

production 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 seasonal

demands of the enterprise is called seasonal working

capital.

For example, a manufacture of woolen textiles,

refrigerators or coolers may need extra funds to carry on

production and to accumulate stock before the sales

operations.

Seasonal working capital being of short-term

nature, it has to be financed from short-term sources like

bank loan etc.

SPECIFIC WORKING CAPITAL

Specific working capital is that part of working

capital which is required to meet unforeseen contingencies

like slump, strike, flood, war etc.

Additional working capital is to be arranged to

meet special exigencies such as launching of extensive

marketing campaign, purchase of goods for stock in view

of future increase in price etc.

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