What is permanent working capital and temporary working capital?

Introduction 

Working capital refers to the capital which is required by an enterprise to smoothly run its daily operations.

It is the measure of the short-term liquidity of a business. 

Working capital is the total of the current assets of a business, net of its current liabilities.

Working capital = Current Assets – Current Liabilities 

The working capital consists of cash, accounts receivable and inventory of raw materials and finished goods fewer accounts payable and other short-term liabilities.

Without a proper level of working capital, a business cannot maintain regular production and pay its creditors and expenses.

Hence, for proper management of working capital, it is divided into types:

• Permanent working capital 
• Temporary working capital 

I have discussed them below:

Permanent Working Capital 

It is the fixed level or minimum level of working capital that an enterprise needs to maintain to ensure production at the normal capacity and pay for its daily expenses. It is independent of the level of production.

It is also known as fixed working capital.

By ‘permanent’,  it does not mean that it will forever remain at the same level or amount but it may change if the overall production capacity changes. But such changes in permanent working capital are not often.

Temporary Working Capital 

It is the level of working capital that depends upon the level of production of a business. It is the excess working capital over the permanent capital that is required to meet seasonal high demand.

It is also known as fluctuating working capital because it tends to change often depending on the level of production.

Temporary working capital is required when high production is required to meet seasonal demands. 

For example, a bakery will need more working capital to meet the increased demand for cakes and pastry during Christmas season 

Graph showing permanent and temporary working capital

Here, the temporary working capital is fluctuating whereas the permanent working capital is gradually increasing with time.