What Is Permanent Working Capital?
Fixed working capital is also known as permanent working capital. It is the minimum funds needed regardless of any fluctuations in business activity. Fixed working capital is the networking capital level below which the former has not gone on any date in a given financial year. NWC is current assets minus current liabilities.
For smoothly running your business operating cycle, you have to pay your financial obligations when due, meet customer demand as and when it emerges, and promote and improve business revenues. For honoring the business obligation, you need to have bank and cash balances as and when needed.
To satisfy customer requirements, business owners have to keep a minimum inventory level. To generate revenue and make customer relations better, they need to extend credit to vendors, and thereby well maintain their accounts receivables.
So, regardless of the levels of business activity, an investment in minimum working capital is always necessary. Permanent or fixed working capital refers to this minimum investment needed in WC irrespective of fluctuations in your business activity.