The amount of working capital a firm has reflects how liquid the company is in the short term. The difference between a business’s current assets and current liabilities at any one period in time is referred to as the working capital of the corporation. A business strategy for managing working capital is one that is used to manage a company’s cash flow. It may be defined as another way of putting it is that working capital management is nothing more than the act of ensuring that a company’s cash flow is sufficient to meet its many obligations. In this topic we will understand the how many types of working capital, Classification of working capital, Kinds of working capital, different types of working capital and top 10 types of working capital.
As a starting point, working capital may be defined as the difference between short-term assets and the difference between current assets and current liabilities. The difference between the two amounts shows the amount of money available to support day-to-day operations of the firm as well as meet short-term financial obligations. Let us examine how many types of working capital are important in further detail. It is possible to have a positive impact on cash flow by practicing excellent working capital management. This involves continuous monitoring, strategic planning, and the efficient use of working capital.
- 1 Top 10 – Types of Working Capital
- 2 Conclusion
- 3 Basics of Working Capital Management for Beginners
Top 10 – Types of Working Capital
Working capital is actually your capital / funds necessary for day-to-day operations for the business. Balance sheet divides working capital into net working capital as well as gross working capital. Operational Capital is been split into different types of working capital based on operating cycle as well as balance sheet.
Operating cycle divides the working capital in temporary working capital and permanent working capital. Permanent working capital additional split in to special working capital and seasonal working capital whereas temporary working capital is divided towards reserve working capital as well as regular working capital.
What are different kinds of working capital? How many types of working capital? What are different types of working capital? Classification of working capital? Kinds of working capital? Let us now dive into detail and understand some of the top 10 – types of working capital which can be useful during different stages of your business activities.
Gross Working Capital
Balance sheet reporting current assets of the firm tend to be popularly known as gross working capital. Current assets are those short-term assets that can easily converted to cash within one year of time-frame. The reason why asset liquidity is a problematic in nature? It is mainly because their liabilities occurs any time and never hold off for the liquidation of current assets and resource. This gap or mismatch produces is overcome by opting short term financing options.
Net Working Capital / Working Capital
Net working capital is a very often used types of working capital in companies. Here are the two ways to derive net working capital. Firstly, you can find net working capital merely by finding difference in current assets over current liabilities from the sheet of the business.
Secondly, net working capital is a subset of current assets which are informally / indirectly financed by long-term assets. Net working capital is consider most important types of working capital for management decisions on working capital financing.
Fixed Working Capital
Fixed working capital is also known as permanent working capital. Fixed working capital means the base capital / investment money required all times to continue business activities. The valuation of current assets keeps on increasing and decreasing over a time. However, there will be minimal current assets required at all times in order to carry-on the business activities efficiently.
Reserve Working Capital
That it relates to your short-term financial arrangement made with your business activities to meet uncertain adjustment or even to meet up with uncertainties. The company / business is always expecting many risks that might be controllable or even uncontrollable. Here reserve working capital can be used in order to manage any uncontrollable situation inside business worldwide.
Temporary Working Capital
It is otherwise also known as Variable Working Capital or Fluctuating Working Capital. Temporary working capital term is easy understand once you understand permanent working capital. Temporary working capital has a good relationship with sales and the degree to production. There is never a consistent production and sales throughout a year. In case of heavy order received, there is an increase in product sales. To fulfil large order you will require additional money as a part of temporary working capital.
Positive Working Capital
Positive working capital means, its one of the types of working capital where the current assets are more than current liabilities. Current liabilities means your obligation to pay within a one year within the standard course of business or perhaps payable out from the current assets within short time period of time or even payable out of the revenue income of this business.
Negative Working Capital
Negative working capital means, its a kind of working capital where the current assets are lesser than current liabilities. There are sometimes in business activities then current liabilities exceeds current assets, that is well enough to present that company is running with the kind of negative working capital. When that type of circumstances arise, it shows that company should make an appropriate plan to manage their financial crisis, which may arise in short period.
Special Working Capital
Special programmes may be done for business development. That the programmes are advertisement campaign, deals advertising strategies, system development tasks, marketing researching strategies, establishing of the latest merchandise, expansion to markets and more.
Unique working capital is the fact that sudden increase in short-term working capital which occurs due to a special occasions. For example, your country whenever organize Olympic Games, there is a sudden rise in business activity and so all the business need additional working capital to fulfil the demand gap.
Regular Working Capital
Minimum amount of working capital required to maintain in any normal business condition, such types of working capital is known as regular working capital. For example: working capital required to perform day-to-day business operation smoothly.
Seasonal Working Capital
Regular demand arises considering festival. In this way, regular working capital means an amount to working capital maintained to satisfy their regular demand for the item. It is relevant towards businesses having that the effect concerning seasons, for example, the manufacturer of sweaters for whom important period is the winters. Generally, their working capital necessity would increase with in season considering higher sales during those period then go-down.
This was all about different types of working capital and understanding how many types of working capital are important to you. It is essentially needed to balance with various working capital methods, techniques and strategies. This will assist your to effectively manage any types of working capital / classification of working capital / kinds of working capital which business may require from time to time.
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Basics of Working Capital Management for Beginners
- Chapter 1: What is Working Capital Management?
- Chapter 2: Importance of Working Capital Management
- Chapter 3: Objectives of Working Capital Management
- Currently Reading: Types of Working Capital
- Chapter 5: Components of Working Capital Management
- Chapter 6: Working Capital Cycle
- Chapter 7: Working Capital Finance
- Chapter 8: Net Working Capital
- Chapter 9: Working Capital Requirement
- Chapter 10: Working Capital Management Quiz For Beginners
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