Question 4 (b)
Permanent versus temporary working capital
5 marks
- Time to write
- About 10 minutes
From an older CBCS paper
Question
Question 4 (b) · 5 marksDistinguish between the permanent and temporary working capital.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Distinguish betweenSet the differences out in a table, basis by basis, not as two separate essays.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Meaning of permanent working capital 1 mark 1 min
- 2 Meaning of temporary working capital 1 mark 1 min
- 3 Points of distinction table 2 marks 4 min
- 4 Financing implication / conclusion 1 mark 2 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- Meaning of permanent working capital (step 1, 1 mark): a definition in one or two lines. It opens the answer, so it takes a minute or two.
- Meaning of temporary working capital (step 2, 1 mark): a definition in one or two lines. A minute or two.
Try it first. About 10 minutes for 5 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
On the basis of time, total working capital is divided into a permanent (fixed) part and a temporary (variable or fluctuating) part.
Permanent working capital is the base level of current assets that a firm must carry at all times to run its day-to-day activities, whatever the season. It stays invested in the business and changes only when operations are permanently scaled up or down. It keeps cash, stock and receivables circulating, and it can be seen as a regular part plus a reserve over and above it.
Temporary working capital is the additional amount needed on top of the permanent level, arising from swings in sales volume; for example, a firm stocks up ahead of a festival season and releases the stock afterwards. It is also called variable or fluctuating working capital, and the DU text groups it as seasonal and special working capital.
| Basis | Permanent working capital | Temporary working capital |
|---|---|---|
| Nature | Minimum investment in current assets, needed continuously | Extra requirement over and above the minimum, needed for a spell |
| Behaviour | Fairly stable; rises only as the business itself grows | Rises and falls with sales, season or special needs |
| Need | Present irrespective of sales fluctuations | Present only while the extra activity lasts |
| Source of finance | Long-term sources such as equity and debt | Short-term sources, such as trade credit or short-term bank finance |
| Risk if financed wrongly | Funding it from short-term sources forces repeated renewals and risks a liquidity crisis | Funding it from long-term sources leaves idle funds and extra interest in the slack months |
Conclusion. The two are separated so that each is financed to match its life: a lasting need is met from lasting funds, a passing need from funds that can be repaid when the need passes.
Where the 5 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Meaning of permanent working capital | 1 |
| 2 | Meaning of temporary working capital | 1 |
| 3 | Points of distinction (table) | 2 |
| 4 | Financing implication / conclusion | 1 |
| Total | 5 |
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