Working capital of a company refers to the flow of liquidity in a company. The current assets vs the current liabilities result in a capital that is required by a company to run its process smoothly. It is like a fuel that gears your business to run placidly. An insufficient working capital remarks the onset of a failed business whereas otherwise, improves the standard of the company and potential for the overall growth of the company. There are different types of working capitals:
Permanent working capital
It is the minimum amount of money that is required, or the company holds to run smoothly. It can also be termed as fixed working capital and varies from one company to another. If there is a shortfall in this money, then you’re forced to apply for a loan.
Temporary working capital
It is also called fluctuating or varying working capital. The difference between your net and permanent working capital is the temporary working capital. It is directly related to the sales and production of a company. For instance, if you own a company that manufactures an umbrella, then to meet the customer needs, you start producing and selling your goods in the offseason. This requires extra funds and money to meet capital needs. It is the extra cash needed to run a company during off-seasons and exceptional cases.
Gross and Net working capital
Gross capital is the investment a company makes to buy the assets required for the company, whereas net capital is the surplus of assets over liabilities. When calculated, a positive sign in the numbers indicates the company’s ability to meet the obligations, while the latter implies otherwise.
Negative working capital
This is a negative sign for the company and is soon expected to reach a financial crisis. The situation arises when the current assets is lower than the current liabilities, i.e. cash input is less than the cash output.
Reserve working capital
A business is always working under uncertainty or awaiting the risk of uncertain events. In such cases, reserve working capital is the money that is borrowed or loaned to meet the requirements of the company, for a short period.
Regular working capital:
It is the amount of money that is usually well maintained with the right balance between the current assets and liabilities, for the normal functioning of a company on a daily basis.
Seasonal working capital
Remember the point we discussed the offseason manufacturing and sales? Seasonal working capital also finds a similarity and falls under the same roof. It is the money required to ensure the smooth running of business during the offseason. It demands for extra hours of work and hustle.
Special working capital
Sometimes a company might be forced to launch new schemes, marketing strategies and much more, to increase their business or aim for higher growth in general. During such situations, special working capital comes in need. It provides the necessary money to upscale a business while ensuring the overall structure to run smoothly.