The quantitative concept of Working Capital

The quantitative concept of Working Capital is known as gross working capital while that under qualitative concept is known as net working capital. Working capital can be classified in various ways. The important classifications are as given below:

Conceptual classification – There are two concept of working capital viz., quantitative and qualitative. The quantitative concept takes into account as the current assets while the qualitative concept takes into account the excess of current assets over current liabilities. Deficit of working capital exists where the amount of current liabilities exceeds the amount of current assets. The above can be summarised as follows:

                        (i) Gross Working Capital = Total Current Assets

                        (ii) Net Working Capital = Excess of Current Assets over Current Liabilities

                        (iii) Working Capital Deficit = Excess of Current Liabilities over Current Assets.

Classification on the basis of financial reports – The information of working capital can be collected from Balance Sheet or Profit and Loss Account; as such the working capital may be classified as follows:

• Cash Working Capital – This is calculated from the information contained in profit and loss account. This concept of working capital has assumed a great significance in recent years as it shows the adequacy of cash flow in business. It is based on ‘Operating Cycle Concept’s which is explained later in this chapter.
• Balance Sheet Working Capital – The data for Balance Sheet Working Capital is collected from the balance sheet. On this basis the Working Capital can also be divided in three more types, viz., gross Working Capital, net Working Capital and Working Capital deficit.

Classification on the Basis of Variability – Gross Working Capital can be divided in two categories viz., (i) permanent or fixed working capital, and (ii) Temporary, Seasonal or variable working capital. Such type of classification is very important for hedging decisions.

• Temporary Working Capital – Temporary Working Capital is also called as fluctuating or seasonal working capital. This represents additional investment needed during prosperity and favourable seasons. It increases with the growth of the business. ”Temporary working capital is the additional assets required to meet the variations in sales above the permanent level.” This can be calculated as follows:

                         Temporary Working Capital = Total Current Assets – permanent Current Assets

•  Permanent Working Capital – It is a part of total current assets which is not changed due to variation in sales. There is always a minimum level of cash, inventories, and accounts receivables which is always maintained in the business even if sales are reduced to a minimum. Amount of such investment is called as permanent working capital. “Permanent Working Capital is the amount of working capital that persists over time regardless of fluctuations in sales.” This is also called as regular working capital.