What Are the Different Types of Working Capital?

Working capital refers to the money needed to perform day-to-day business operations. These loans are not used to buy or invest in long-term assets and are instead used to meet the short-term operating needs of businesses. Typically, enterprises calculate working capital requirements based on their current assets and current liabilities as a working capital ratio, which is current assets divided by current liabilities. Every business requires working capital, and the requirement may vary depending on the business.

It is an essential requirement of business in today's scenario. It is very difficult for businesses to grow and thrive without adequate working capital, which is required to meet their daily expenses. Businesses can function well only when they have sufficient working capital. Lack of working capital leads to a shortage of raw materials and other resources which can hinder the success of any business. Conversely, surplus working capital can be an indication of operational inefficiency.

Therefore, it is essential to have a good optimum working capital to run the business successfully.

Also, one must re-evaluate the return on money invested in the business as working capital. The return so obtained should not be less than the return earned by the business during the normal course of operations.

Most of the time, businesses fail not because of insufficient profits but because of a lack of sufficient funds required to run their daily operations. Therefore, the management of working capital plays a vital role in the success or failure of a business. This is because working capital highly affects the profitability and liquidity of the business. So, the first step for starting a business should be to find out the actual working capital required and there should be different avenues of financing such working capital. This step is necessary to ensure that the working capital in hand is sufficient to meet the obligations of the business in the short run. Therefore, one must properly understand the meaning of working capital and its importance in business and the factors affecting the working capital of a specific business.

Different Types of Working Capital

Let's look at the different types of working capital loans that a business can apply for based on their needs.

• Fixed Working Capital
• Temporary Working Capital
• Gross and Net Working Capital
• Negative Working Capital
• Reserve Working Capital
• Regular Working Capital
• Seasonal Working Capital
• Special Working Capital

• Fixed Working Capital
  
  Fixed working capital is the amount that is required to make liability payments before you can convert assets or invoices into cash. This is also known as the operating cycle and many businesses need an ongoing, sometimes permanent, solution to fill this gap. Also known as permanent working capital, it is the minimum working capital required to function smoothly.
   
• Temporary Working Capital
  
  Temporary working capital is the capital required by the business during some specific time of the year. For example, this capital may be required during the festive season due to the immediate demands of the business. This requirement is considered temporary and changes according to business operations and market conditions. It also means that you only need a short-term loan to fund your business and when the cash starts rolling in, you can pay it off sooner.
   
• Gross and Net Working Capital
  
  Gross working capital is the sum of all current assets of the company. These assets are those which can be converted into cash within a year. It includes
  Cash
  Accounts receivable
  Marketable securities like stocks
  Short-term investments
  The preferred way of expressing working capital is the ratio of current assets to current liabilities. The net working capital of the business is generally the difference between current assets and current liabilities.
• Negative Working Capital
  
  The shortfall or deficit is known as negative working capital and shows the excess of current liabilities over current assets. Negative working capital increases when current liabilities exceed current assets. In other words, short-term debt is worth more than short-term assets. When managed properly, negative working capital can be a way to fund your business's growth in sales from other people's money; namely your suppliers.
   
• Reserve Working Capital
  
  Reserve working capital is a type of fund that the business keeps over and above the required working capital. Businesses use such funds as a contingency for unforeseen market conditions or opportunities.
   
• Regular Working Capital
  
  Regular working capital is the minimum amount of capital required by a business to perform its day-to-day business operations. For example, making monthly payments of salaries and wages and overhead expenses for processing raw materials needed for the business. Businesses need to maintain an appropriate level of regular working capital for stable operations.
   
• Seasonal Working Capital
  
  This working capital refers to the increased amount of working capital required by a business during the peak season of the year. Businesses that deal in the production or manufacture of products or provide services that have seasonal demand are required to maintain seasonal working capital. It can be considered as a form of reserve working capital but only to adapt to sudden changes in the market and seasonal fluctuations. Seasonal working capital is treated as a temporary increase in working capital. This mainly applies to businesses that are seasonal, for example, manufacturers of raincoats and umbrellas for which the relevant season is monsoon. Generally, their working capital requirement rises in that season due to higher demand and sales and then goes down as collections from debtors exceed sales.
   
• Special Working Capital
  
  A special working capital loan is an increase in temporary working capital due to a special event that does not normally occur. It has no predictive basis and is normally a rare event. For example, award ceremonies take place once every year, and such events require a large amount of working capital to meet the expenses successfully. A special working capital loan is an ideal way to cover the full cost of such events.

Benefits of Working Capital Loans

• The benefits of working capital loans are as follows:
• No restriction on utilization of loan funds
• It-Easy to get a working capital loan with quick disbursement or drawdown
• The loan is given against the goodwill of the business and does not require any collateral
• Reasonable interest rate and usually short term of the loan, perhaps 12 months
• No restriction on the use of funds

Conclusion

Poonawalla Fincorp provides loans to help small businesses reach their full potential. You can get loans with affordable interest rates, zero hidden charges, quick approvals, and much more. These unsecured business loans are generally approved within 24 hours, come with easy eligibility criteria, and can be applied for with minimal paperwork. These unique features make Poonawalla Fincorp the best, the fastest and most convenient form by which anyone can avail of a loan to meet the immediate financial needs of your business. You can apply for Poonawalla Fincorp Business Loan online and get an instant loan.

FAQs

What is Working Capital Management?

Working capital management refers to the management of a company's short-term assets and liabilities to ensure its operational efficiency and liquidity. It involves monitoring and optimizing the levels of cash, accounts receivable, accounts payable, and inventory to maintain a healthy cash flow position.

What is the Working Capital Cycle?

The working capital cycle refers to the time it takes for a company to convert its resources into cash through its operational activities, covering the period from cash outflows to cash inflows.

What are the five sources of working capital?

The five resources of working capital are

• Cash: Represents readily available funds that can be used for day-to-day operations and to meet immediate obligations.
• Accounts receivable: Refers to the outstanding amounts owed to the company by its customers for goods or services given on credit.
• Inventory: Includes the goods or raw materials held by the company for production, sale, or distribution.
• Accounts payable: Refers to the outstanding amounts that a company owes to its suppliers or creditors for goods or services received on credit.
• Short-term loans: Serve as additional financial resources obtained from lenders to support working capital needs during periods of cash flow mismatch or expansion.