Permanent and temporary working capital

On the basis of time, working capital is classified as permanent (fixed) and temporary (variable).

Permanent (fixed) working capital is the minimum amount of current assets the firm needs at all times to carry on its normal operations: the level of stock, debtors and cash below which it never falls. It ensures the circulation of current assets from cash to inventories, inventories to receivables and receivables back to cash. It grows as the business grows, and it is further divided into regular working capital (for that circulation) and reserve working capital (kept for contingencies such as strikes, price rises or depression).

Temporary (variable) working capital is the amount needed over and above the permanent level to meet seasonal demands and special needs, and it fluctuates over time. It is divided into seasonal working capital (for the peak season) and special working capital (for special needs such as an extensive marketing campaign).

Significance. Permanent working capital is a long-term need and is financed from long-term sources, while temporary working capital can be met from short-term sources.