Difference between variable and permanent working capital, Factors of working Capiatal

Q. Explain the difference between variable working capital and permanent working capital.

Working capital is a part of capital investment is used for running the business such like money which is used to buy stock, pay expenses and finance credit.

Considering time as the basic of classification there are two types of working capital:

1) Permanent working capital;

2) Variable working capital;

The difference between variable working capital and permanent working capital is as follows:

1) Permanent working capital is referred to finance to stock of finished goods, debtors balances etc. Variable working capital is used to carry out day to day operations.

2) Permanent working capital consists of stock of raw materials, stock of work-in-process, stock of finished goods, debtors balance, etc. Variable working capital consists of cash, marketable securities, account receivable, stock etc.

3) Permanent working capital includes long term financial decisions. Variable working capital includes short term financing decisions.

4) Permanent working is mainly required for operational activities. Variable working capital is required for trading activities.

Q. Explain the Factors determining the need for working capital.

The following factors determine the need/requirement for working capital:

(1) Size of business;

(2) Stage of development;

(3) Time of production

(4) Rate of stock turnover ratio;

(5) Buying and selling terms;

(6) Seasonal consumption;

(7)  Profit level;

(9) Growth and expansion;

(10) Production cycle;

(11) General nature of business;

(12) Business cycle