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Types of Working Capital

>> November 28, 2010

When I already wrote types of working capital in working capital management, then why am I writing here again types of working capital. It has two reason, one is explain types of working capital more detail. Second, I want to create link in working capital management, so that when any student will be interested to know the types of working capital in detail, he or she can come here for reading and studying. So, Now, I am concentrating on types of working capital.

1. Gross working capital

Total or gross working capital is that working capital which is used for all the current assets. Total value of current assets will equal to gross working capital. In simple words, it is total cash and cash equivalent on hand. But remember, we do not account of current liabilities in gross working capital.

2. Net Working Capital

Net working capital is the excess of current assets over current liabilities.

Net Working Capital = Total Current Assets – Total Current Liabilities

This amount shows that if we deduct total current liabilities from total current assets, then balance amount can be used for repayment of long term debts at any time. It also measure of both a company's efficiency and its short-term financial health.

3. Permanent Working Capital

Permanent working capital is that amount of capital which must be in cash or current assets for continuing the activities of business. It also shows  the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations.

4. Temporary Working Capital

Sometime, it may possible that we have to pay fixed liabilities, at that time we need working capital which is more than permanent working capital, then this excess amount will be temporary working capital. In normal working of business, we don’t need such capital.

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