Different types of working capital are briefly described here.
Gross and Net Working Capital
Gross Working Capital
On the basis of gross concept, working capital refers to the total amount invested in the current assets. Current assets are those assets of the company which can be converted into cash within one year. The business organization may have various types of current assets such as checking accounts, temporary investment, account receivables, debtors, inventories, cash at bank, cash on hand etc. And the gross working capital is calculated by adding all the items of current assets. Symbolically,
Gross working capital = ∑(current assets)
= Account Receivables + Debtors + Cash on hand + Cash at bank + Inventories + Prepaid expenses + …..
Net Working Capital
On the other hand, net concept states that working capital is the difference between total current assets and total current liabilities. Here current liabilities refer to the short-term liabilities of the company which should be payable within one year. Some of the current liabilities are Account payables, advance incomes, creditors, short-term loans, outstanding expenses, interest payables, bank overdrafts, accrued expenses etc. It says that working capital is calculated by deducting the total current liabilities form the total current assets. It can be represented by the following formula:
Net Working Capital = Total current assets – total current liabilities
Permanent and Temporary Working Capital
Permanent Working Capital
Every business organization maintain certain fixed amount of capital as a security to operate the day to day business activities smoothly without any interruption which is termed as permanent working capital. If the company has a policy to maintain $50000 capital each day irrespective of the daily requirement then it will be the fixed working capital for the company. There are two types of permanent working capital: regular working capital and reserve working capital.
Regular Working Capital
Regular working capital refers to the minimum amount of fund that the business organization should maintain to carry out day to day business operation without any financial difficulty.
Reserve Working Capital
Reserve working capital is the excess amount of fund over regular working capital to manage unforeseen contingencies ( like collection delayed, strikes, lockout, machine breakdown etc. ) that may arise during business operation.
Temporary Working Capital
As you know that future is uncertain. So it is hard to estimate the exact demand of the product in the future time. Sometimes demand of the products increases at maximum level and sometimes very less demand is made. At the time of peak demand periods more working capital is needed whereas in a lean period less working capital is needed other than fixed working capital. Temporary working capital is the working capital that fluctuates with fluctuation in the production level. In other word, it is the additional funds needed to manage the seasonal and special demand. Temporary capital is of two type: Seasonal and Special Working Capital.
Seasonal Working Capital
Seasonal working capital is the additional temporary working capital needed to manage the seasonal demand of the product. Demand of the product increases when it’s season came which leads to the additional working capital along with the fixed worry capital. The additional working capital that needs to manage the seasonal demand is termed as seasonal working capital.
Special Working Capital
Special working capital is a type of temporary working capital which is needed to manage the occasional or special demand. In some special occasion the products demand may raise surprisingly which requires additional working capital to manage it which is called seasonal working capital. For example, at the time of Christmas, Dewali, Eid etc. there is high demand of product. Similarly, in special events like wedding, birthday celebration etc. also increase demand of the product.