Types and Needs of Working Capital, Accountancy and Financial Management | Accountancy and Financial Management - B Com PDF Download

Types of Working Capital

Working Capital may be classified into three important types on the basis of time.

Fig. Types of Working Capital

Permanent Working Capital

It is also known as Fixed Working Capital. It is the capital; the business concern must maintain certain amount of capital at minimum level at all times. The level of Permanent Capital depends upon the nature of the business. Permanent or Fixed Working Capital will not change irrespective of time or volume of sales.

Fig.  Permanent Working Capital

Temporary Working Capital

It is also known as variable working capital. It is the amount of capital which is required to meet the Seasonal demands and some special purposes. It can be further classified into Seasonal Working Capital and Special Working Capital.

The capital required to meet the seasonal needs of the business concern is called as Seasonal Working Capital. The capital required to meet the special exigencies such as launching of extensive marketing campaigns for conducting research, etc.

Fig.  Temporary Working Capital

Semi Variable Working Capital

Certain amount of Working Capital is in the field level up to a certain stage and after that it will increase depending upon the change of sales or time.

Fig. Semi Variable Working Capital

Needs of Working Capital

Working Capital is an essential part of the business concern. Every business concern must maintain certain amount of Working Capital for their day-to-day requirements and meet the short-term obligations.

Working Capital is needed for the following purposes.

1. Purchase of raw materials and spares: The basic part of manufacturing process is, raw materials. It should purchase frequently according to the needs of the business concern. Hence, every business concern maintains certain amount as Working Capital to purchase raw materials, components, spares, etc.

2. Payment of wages and salary: The next part of Working Capital is payment of wages and salaries to labour and employees. Periodical payment facilities make employees perfect in their work. So a business concern maintains adequate the amount of working capital to make the payment of wages and salaries.

3. Day-to-day expenses: A business concern has to meet various expenditures regarding the operations at daily basis like fuel, power, office expenses, etc.

4. Provide credit obligations: A business concern responsible to provide credit facilities to the customer and meet the short-term obligation. So the concern must provide adequate Working Capital.

Working Capital Position/ Balanced Working Capital Position.

A business concern must maintain a sound Working Capital position to improve the efficiency of business operation and efficient management of finance. Both excessive and inadequate Working Capital lead to some problems in the business concern.

A. Causes and effects of excessive working capital.

(i) Excessive Working Capital leads to unnecessary accumulation of raw materials, components and spares.

(ii) Excessive Working Capital results in locking up of excess Working Capital.

(iii) It creates bad debts, reduces collection periods, etc.

(iv) It leads to reduce the profits.

B. Causes and effects of inadequate working capital

(i) Inadequate working capital cannot buy its requirements in bulk order.

(ii) It becomes difficult to implement operating plans and activate the firm’s profit target.

(iii) It becomes impossible to utilize efficiently the fixed assets.

(iv) The rate of return on investments also falls with the shortage of Working Capital.

(v) It reduces the overall operation of the business.