which capital remains in business almosr permanently
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Permanent Working capital
Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. Some minimum amount of raw materials, work-in-progress, bank balance, finished goods etc., a business has to carry all the time irrespective of the level of manufacturing or marketing operations. This level of working capital is referred to as core working capital or core current assets. But the level of core current assets is not a constant sum at all the times. For a growing business the permanent working capital will be rising, for a declining business it will be decreasing and for a stable business it will almost remain the same with few variations. So, permanent working capital is perennially needed one though not fixed in volume. This part of the working capital being a permanent investment needs to be financed through long-term funds.
Temporary Working capital
The temporary or varying working capital varies with the volume of operations. It fluctuates with the scale of operations. This is the additional working capital required from time to time over and above the permanent or fixed working capital. During seasons, more production/sales take place resulting in larger working capital needs. The reverse is true during off-seasons. As seasons vary, temporary working capital requirement moves up and down. Temporary working capital can be financed through short term funds like current liabilities. When the level of temporary working capital moves up, the business might use short-term funds and when the level for temporary working capital recedes, the business may retire its short-term loans.
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Answer:
Permanent & Temporary Working Capital. Permanent working capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations. ... So, permanent working capital is perennially needed one though not fixed in volume.
Permanent working capital is the minimum investment required in working capital irrespective of any fluctuation in business activity. Also known as fixed working capital, it is that level of net working capital below which it has never gone on any day in the financial year. Net working capital (NWC) means current assets less current liabilities. This term is important to be calculated for decisions relating financing mix of working capital and save the interest cost of the firm.
Therefore, it is clear from the above explanation, irrespective of the activity levels of the business, a minimum investment in the current asset is always required. This investment requirement is called permanent working capital.