What are the different types of working capital?
Working capital can be classified into 10 distinct categories, each designed to address particular financial needs within a business.
The various types of working capital include:
1. Permanent working capital
The minimum working capital required for a business is called permanent, fixed, or hardcore working capital. The available amount must not fall below this allocated threshold for smooth operations.
2. Gross working capital
Gross working capital represents the sum of all current assets held by a company. This includes cash, receivables, inventory, marketable securities, and other short-term assets or equivalents.
It offers an overview of the resources available to support daily operations. However, since it does not factor in current liabilities, it may not give a complete picture of short-term financial health.
Check your business loan eligibility if you're planning to boost your gross working capital for better liquidity.
3. Temporary working capital
Temporary or variable working capital is the difference between networking and permanent working capital, closely related to the overall sales and production. It is also called fluctuating working capital as it changes as per the business operations and market.
4. Negative working capital
When calculating the networking capital, it either leads to a surplus or a deficit. A shortfall or deficit is negative working capital and reflects an excess of current liabilities over current assets.
5. Reserve working capital
Reserve working capital is a type of fund a business maintains over and above the required working capital. Companies use such funds as a contingency for unexpected market situations or opportunities.
6. Regular working capital
Regular working capital is the minimum working capital that a business needs to run its daily operations. Companies must maintain the appropriate level of average working capital for stable operations.
7. Seasonal working capital
Businesses producing products or providing services with seasonal demands need to maintain a seasonal working capital. It is considered a form of reserve working capital, but only to adapt to seasonal fluctuations in the market.
8. Special working capital
Special working capital is the fund for business development and other urgent functions based on requirements and circumstances.
9. Net Working Capital
Net working capital (NWC) is calculated as current assets minus current liabilities. It reflects a company’s capacity to meet short-term obligations using its existing assets. A positive figure suggests that the business is in a healthy position to continue operations and pursue growth opportunities. On the other hand, a negative net working capital may indicate liquidity challenges, prompting the need for solutions like invoice factoring.
Check your pre-approved business loan offer to bridge short-term cash flow gaps effectively.
10. Variable Working Capital
Variable working capital changes in line with the level of business activity. It rises when operations and sales peak and falls during slower phases. This form of capital is directly linked to day-to-day operational needs, shifting as production and demand vary. Managing variable working capital effectively helps a business stay agile, adapt to market fluctuations, and maintain overall financial health.
Conclusion
Depending on the type of working capital required, you can opt for additional finance in the form of a business loan to maximise the operational efficiency of your business. The working capital loan offered by Bajaj Finance is substantial and easy to apply for, with simple eligibility criteria and minimal documentation.
Apply for your working capital loan from Bajaj Finance today and enjoy features such as an attractive Business Loan Interest Rate, quick approval, and fast disbursal.
Frequently asked questions
The three types of working capital are permanent working capital, temporary working capital, and negative working capital. Permanent working capital is the minimum number of current assets required to run a business. Temporary working capital is the additional number of current assets needed to meet seasonal or cyclical demand. Negative working capital is when current liabilities exceed current assets, indicating a short-term liquidity problem.
