1) Gross and Net Working Capital
Gross working capital means the total Current Assets without deducting the Current Liabilities.
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Gross Working Capital = Current Assets |
Thus, Gross Working Capital is equal to the cash balance and the amount blocked up in debtors, stock etc.
2) Net Working Capital
However, a part of the Gross Working Capital is financed by Current Liabilities such as creditors by goods, bills payable and creditors for expenses. Therefore, Net Working Capital is equal to Gross Working Capital – Current Liabilities or = Current Assets – Current Liabilities.
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Net Working Capital = Current Assets – Current Liabilities |
This is the most common type of Working Capital. It is also known as Net Current Assets. It indicates the amount available to meet short term dues of the concern.
1) Permanent Working Capital
A concern must always have a minimum amount of Working Capital at its disposal to be able to meet Current Liabilities as and when they arises. In other words a concern must have minimum amount of ‘Funds’ to ensure liquidity and solvency. This minimum amount of Working Capital is required to enable the concern to operate at the lowest level of activity. Such minimum amount of Working Capital is called ‘Permanent Working Capital’. It is also called the Core Working Capital.
2) Temporary Working Capital
It is also called as Fluctuating Working Capital. If the concern wants to increase its level of activity and produce and sell more goods, naturally it will need additional amount of Working Capital. If the increase level of activity is temporary or seasonal the additional amount of Working Capital required is called Temporary Working Capital.