What is Permanent Working Capital?

For any business to be successful, it must maintain business efficiency by managing cash flow and working capital. A part of this is permanent working capital, which is essential for keeping operations stable and long-term financial health. Read on to understand in detail what permanent working capital is, its types, calculation, advantages, and limitations.

Permanent Working Capital: Definition & Understanding

Permanent working capital, also called fixed working capital or minimum working capital, is the minimum investment a business should keep in its working assets. Maintaining this amount of current assets ensures smooth operations at all times.

Key Components of Working Capital Loans

Here are the key components of permanent working capital:

• Cash Reserves: The absolute minimum cash a business should have available (or in the bank) to meet daily expenses and emergency payments. Think of it like a rainy day fund that a business should hope to never need.

• Inventory: Critical inventory, raw materials, and finished goods, always on hand and never entirely depleted to avoid production or sales interruption.

• Accounts Receivable: Base amount due from customers on credit sales; it always exists, since even as old invoices get paid, new sales create new receivables.

• Prepaid Expenses: Advance payments for items such as rent, utilities, software, or insurance that enable uninterrupted business operations.

Types of Permanent Working Capital

Below are the types of permanent working capital:

• Regular Working Capital: The day-to-day funds needed for the purchase of materials, meeting short-term commitments, and dealing with sales cycles.

• Reserve Working Capital: A buffer kept aside for unexpected expenditures, emergencies, or unanticipated interruptions of business.

How to Calculate Permanent Working Capital?

The permanent working capital formula is as follows:

Permanent (Fixed) Working Capital = Minimum Current Assets – Minimum Current Liabilities

Minimum current assets are the minimum cash, inventory, and receivables a business always needs. The must-pay short-term liabilities that are unavoidable are the current liabilities.

Subtract the liabilities from the assets, and that’s the permanent working capital!

Why is Permanent Working Capital Essential?

Permanent working capital isn’t just a technical financial metric; it’s an insight into a company's operational efficiency. Irrespective of the seasonal ups and downs, permanent working capital is the force in business operations that keeps things running smoothly. Here’s why it is so important:

• Ensures Continuous Operations: Permanent working capital guarantees that there will always be sufficient working capital to cover essential daily expenses, such as paying employees, purchasing raw materials, and meeting regular obligations. This stability prevents operational disruptions.

• Supports Credibility and Trust: Ensuring there’s enough working capital instils confidence among suppliers, customers, and lenders. It assures them that the business can meet its commitments, improving creditworthiness and helping build long-term relationships.

• Shields Against Uncertainty: Adequate permanent working capital serves as a buffer against unexpected expenses or unnecessary costs, allowing the company to absorb short-term setbacks without jeopardising business growth.

• Facilitates Growth and Expansion: A stable financial foundation makes it easier to plan for business growth. Businesses with sufficient permanent working capital can invest in new projects, expand operations, and seize market opportunities without risking liquidity.

• Essential for MSMEs and NBFC-backed Businesses: For MSMEs and companies supported by NBFCs, sufficient permanent working capital is crucial. It helps manage cash flow fluctuations, comply with lender requirements, and ensure sustainable financial health.

How to Manage Permanent Working Capital?

Managing permanent working capital is about ensuring the essential funds tied up in core operations, such as inventory, receivables, and cash, are always available and well-monitored. These strategies can help maintain that baseline operational stability:

• Determine the Minimum Capital Requirement: Establish the baseline by calculating ongoing costs like salaries, utilities, and necessary inventory. This figure becomes the business’s non-negotiable capital floor.

• Maintain Efficient Stock Control: Inventory management is essential; keep the inventory lean but sufficient. Use demand forecasting and stock turnover tracking to prevent overstocking or stockouts.

• Improve Debtor Collection: Ensure faster inflow of receivables by setting strict credit policies, regular follow-ups, and offering early payment incentives.

• Utilise Financial Tools and Forecasting: Use accounting systems to track cash flow, monitor payables/receivables, and get real-time financial data to support decision-making.

• Prepare for the Unexpected: Maintain an emergency fund or contingency reserve to shield the business from disruptions like supply chain issues or economic slowdowns.

How to Improve Permanent Working Capital?

Improving permanent working capital involves strengthening a business’s financial foundation through better funding choices, increased efficiency, and long-term capital stability.

Here are several effective strategies:

1. Opt for Strategic Debt Financing: Raising a business loan can improve permanent working capital if done with careful planning. Assess the capital needs based on the business cycle, choose a suitable loan type, and borrow only what you can repay without straining cash flow.

2. Consider Equity Financing for Long-term Stability: Equity financing involves selling ownership shares to raise capital. This method increases the permanent capital base without increasing debt obligations, though it does dilute ownership. It’s ideal for businesses seeking stable, long-term funding.

3. Use Asset-based Financing: Unlock funds by leveraging the business assets such as receivables, inventory, or property. This method can improve liquidity without giving up equity, though it requires careful asset management.

4. Optimise Operational Efficiency: Cutting waste, improving process speed, and negotiating better terms with suppliers can free up cash. Small improvements across functions can cumulatively make a big difference to working capital.

5. Increase Profit Retention: Rather than distributing all profits as dividends, reinvest a portion back into the business to build a stronger internal capital base.

6. Diversify Revenue Streams: Launching new products or tapping into new markets can ensure that more cash flows consistently into operations, strengthening the long-term capital reserves.

Benefits of a Business Loan for Permanent Working Capital

Taking on a Business Loan to fund permanent working capital has multiple advantages:

• Provides reliable funds to meet ongoing operating expenses.

• Enables businesses to negotiate better terms with suppliers.

• Frees up cash for long-term investments and strategic growth.

• Strengthens the ability to handle payment delays from customers.

• Helps maintain a buffer for unforeseen emergencies or expenses.

Also Read:  Working Capital Cycle: Definition & Complete Overview

How to Apply for a Business Loan for Permanent Working Capital with Poonawalla Fincorp?

The application process for a Business Loan for permanent working capital is simple and easy with Poonawalla Fincorp. Just follow the steps below:

• Step 1: Click on the ‘Apply Now ’ button.

• Step 2: Provide your name, DOB, and other details (Poonawalla Fincorp keeps the process quick, with minimal data entry)

• Step 3: Upload the necessary documents and hit the ‘Submit’ button.

Upon successful verification, the loan amount will be instantly disbursed to your bank account. Thanks to a streamlined disbursement process, funds reach you with minimal delay.

Whether it’s working capital, business expansion, or inventory purchase, the loan adapts to your specific needs. Plus, throughout the process, you'll get timely support and clear guidance, making it easier to focus on your business goals.

Also Read:  What is Working Capital Term Loan - Meaning, and How It Works?

Difference Between Permanent Working Capital and Temporary Working Capital

Here are the key differences between the permanent and temporary working capital:

Aspect	Permanent Working Capital	Temporary Working Capital
Nature	Minimum funds required at all times for operations	Extra funds are needed to address short-term needs
Stability	Relatively stable and consistent	Fluctuates with business cycles or seasons
Duration	Long-term (ongoing requirement)	Short-term (as per specific or seasonal needs)
Purpose	Enables routine business functions	Meets temporary demands such as festive sales
Financing	Usually covered by long-term funding	Typically managed through short-term borrowings
Other Names	Fixed Working Capital	Fluctuating/Variable Working Capital
Examples	Maintaining minimum inventory, cash, and receivables	Stocking up for Diwali sales, ad campaigns

 

Understanding and managing both types effectively is a hallmark of a strong financial strategy for any business.

Other Types of Working Capital

• Gross Working Capital: The total value of a company’s current assets.

• Net Working Capital: The difference between current assets and current liabilities.

• Negative Working Capital: When current liabilities are greater than current assets, it indicates short-term financial risk.

• Seasonal Working Capital: Additional capital needed to handle business activity that peaks during certain seasons.

• Special Working Capital: Temporary funds required for unexpected, infrequent business events outside regular operations.

To Conclude

Permanent working capital forms the foundation for smooth business operations, ensuring that companies can meet day-to-day expenses and are prepared for unexpected challenges. By maintaining adequate permanent working capital, businesses not only keep their core processes uninterrupted but also build financial credibility and resilience for future growth.

Looking for funds to boost your permanent working capital? Choose a trustworthy NBFC like Poonawalla Fincorp to get a Business Loan today. Apply now!

Frequently Asked Questions

What are common examples of permanent working capital in a business?

Examples of permanent working capital include rent, utilities, and employee salaries, which need to be maintained at stable levels. These recurring expenses form the core financial base required for daily operations.

Why is permanent working capital important for business growth?

Permanent working capital is crucial because it ensures smooth daily operations, operational costs, and financial stability, allowing businesses to consistently meet essential expenses like salaries, rent, and utilities.

What is the main difference between permanent and temporary working capital?

The main difference between permanent working capital and temporary working capital is their nature and usage: Permanent working capital is the minimum amount always needed for ongoing operations, while temporary working capital is the additional amount required to meet short-term or seasonal demands.

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 optimising 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 listed below:

• 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.

How to boost permanent working capital?

Boost permanent working capital by reinvesting profits, raising equity, or securing long-term loans. Improving efficiency, controlling costs, and using asset-based financing also help strengthen your capital base for sustained operations.

How to calculate working capital?

The formula for calculating the working capital of a business is to subtract current assets from current liabilities.

Does working capital impact daily operations?

Yes, working capital directly affects daily operations; it ensures there are enough funds to manage expenses like inventory, salaries, and bills. A healthy working capital position keeps business activities running smoothly without disruptions.