Types of Permanent Working Capital
However, fixed working capital (FWC) does not really depend upon the level of manufacturing or sales. FWC is similar to fixed assets, owing to its fixed nature. It is important to note that this is not literally permanent. The level of permanent working capital can also change over time, depending on the growth of the company and its business cycles.
Fixed working capital is a category of working capital. It can be further classified into two: “Regular” and “Reserve”.
Regular Working Capital
The term “regular working capital” refers to the minimum level of WC that is essential in the ordinary course of business. It has to flow from one type to another, i.e., from cash to stock, stock to accounts receivable, accounts receivable to cash, etc.
Reserve Working Capital
This refers to the WC cushion that has to be kept over and above normal the working capital amount, for contingencies that may come about because of unexpected situations. For example, reserve working capital emerges from contingencies such as recession and trade union strikes, to name two.