Working capital can be categorized basis:
1. Balance sheet view
2. Operating cycle view
I. Balance sheet View:
Here categorization is done on the basis of the components of working capital:
• Gross Working Capital
This simply means the total block of current assets available with a firm. The block of current assets mainly comprises debtors, stock, and prepaid expenses.
• Net Working Capital
The current assets available after subtracting the current liabilities owed by the firm, in the form of creditors, outstanding expenses, and unpaid taxes, constitute the net working capital of the firm.
II. Operating Cycle View:
Here the classification is done on the basis of the time required to convert stock into cash:
• Permanent or Fixed Working Capital
This is completely dependent on the requirement of the firm. Every firm must allocate a fixed amount below which the overall level of working capital must not fall. This minimum level of working capital is called permanent or fixed working capital. A shortfall in this, can be met with funds from a working capital loan.
• Temporary or Variable Working Capital
The difference between the net working capital and permanent working capital can be termed as temporary or variable working capital.
Businesses can decide the kind of working capital they need to adopt basis their overall business strategy and plan.
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