{"id":8094,"date":"2023-06-13T14:19:16","date_gmt":"2023-06-13T08:49:16","guid":{"rendered":"https:\/\/razorpay.com\/learn\/?p=8094"},"modified":"2024-03-11T15:13:18","modified_gmt":"2024-03-11T09:43:18","slug":"types-of-working-capital","status":"publish","type":"post","link":"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/","title":{"rendered":"Capital Fuel: Types of Working Capital Explained"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Working capital is the liquidity available to a company to carry out its day-to-day expenses. Two fundamental elements of business affecting working capital are current assets and current liabilities. The short term financial position of a business can be determined by analysing these two metrics.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There are many types of working capital depending on its value and periodicity. It helps in allocating cash, inventories, and accounts receivable and payable better.\u00a0<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_80 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d902d7c1ba1\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d902d7c1ba1\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#What-is-Working-Capital\" >What is Working Capital?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#Types-of-Working-Capital\" >Types of Working Capital<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#1-Permanent-Working-Capital\" >1. Permanent Working Capital\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#2-Variable-Working-Capital\" >2. Variable Working Capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#3-Gross-Working-Capital\" >3. Gross Working Capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#4-Net-Working-Capital\" >4. Net Working Capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#5-Negative-Working-Capital\" >5. Negative Working Capital<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#Factors-Determining-the-Requirement-of-Working-Capital\" >Factors Determining the Requirement of Working Capital<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#Did-you-know\" >Did you know?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-working-capital\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What-is-Working-Capital\"><\/span><b>What is Working Capital?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Working capital is the difference between the current assets and liabilities of a company. This difference projects how much capital is available to a company to meet its regular needs.<\/span>\u00a0<span style=\"font-weight: 400;\">To calculate the working capital of a business, use this equation:<\/span><\/p>\n<p style=\"text-align: center;\"><strong>Working Capital = Current Assets \u2013 Current Liabilities<\/strong><\/p>\n<p>Also read: <a href=\"https:\/\/razorpay.com\/learn\/changes-in-working-capital-formula\/\">Understanding Changes in Working Capital Formula<\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Types-of-Working-Capital\"><\/span><b>Types of Working Capital<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3><span class=\"ez-toc-section\" id=\"1-Permanent-Working-Capital\"><\/span><b>1. Permanent Working Capital\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">It is the minimum working capital a business requires to operate and cover all its liabilities. In other words, it is the least amount of current assets required to run a business. The amount of permanent working capital required depends on the growth of the business. If the business grows, it will have more liabilities. Thus, the business will need a much higher working capital.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This capital further divides into two types of working capital:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Regular Working Capital:<\/b><span style=\"font-weight: 400;\"> It includes the minimum capital required for a business to cover all its day-to-day business operations costs. Regular working capital includes salaries, wages, maintenance and overhead expenses. Businesses need to maintain regular working capital to ensure smooth and stable operations.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Reserve Margin Working Capital: <\/b><span style=\"font-weight: 400;\">Reserve Margin Working Capital is the amount of capital which companies reserve in addition to their regular working capital. Businesses uses it as emergency capital in case of unforeseen circumstances. The fund also acts as a contingency during unexpected market situations, opportunities or natural calamities.<\/span><\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"2-Variable-Working-Capital\"><\/span><b>2. Variable Working Capital<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Variable working capital or fluctuating working capital is one of the types of working capital that businesses use as a temporary period investment. The amount of such capital changes depending upon the growth and size of the business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There are two types of working capital<\/span> <span style=\"font-weight: 400;\">in terms of variables:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Seasonal Variable Working Capital: <\/b><span style=\"font-weight: 400;\">Businesses often need some extra amount of working capital to carry out its operation. At these times they borrow funds or take loans to meet their working capital needs. It is mainly common for seasonal businesses. <\/span><b>\u00a0<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Special Variable Working Capital: <\/b><span style=\"font-weight: 400;\">Businesses require special or supplementary working capital to undertake new operations or cope with unforeseen events. Thus, the special variable working capital is used for risk management, launching new products or financial marketing campaigns.<\/span><\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"3-Gross-Working-Capital\"><\/span><b>3. Gross Working Capital<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">It is the calculated total of a company\u2019s current assets. Gross working capital does not involve the deduction of the company\u2019s liabilities.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"4-Net-Working-Capital\"><\/span><b>4. Net Working Capital<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Net working capital is one of the most critical<\/span> <span style=\"font-weight: 400;\">types of working capital one can estimate by deducting net current assets from net current liabilities. Businesses that have enough net working capital, have an increased possibility to grow into something big. Other than that, companies having negative or insufficient net working capital have higher odds to declare bankruptcy.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"5-Negative-Working-Capital\"><\/span>5. Negative Working Capital<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Negative working capital refers to a financial situation where a company&#8217;s current liabilities exceed its current assets. In simpler terms, it means that a business has more short-term debts to pay off than the cash and assets readily available to cover those obligations.<\/p>\n<p>Negative working capital can also signal potential challenges in meeting financial obligations and may require careful monitoring and proactive measures to ensure long-term stability.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Factors-Determining-the-Requirement-of-Working-Capital\"><\/span><b>Factors Determining the Requirement of Working Capital<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li aria-level=\"1\"><b>Type and Size of the Business<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The amount of working capital a business requires depends a lot on the size and nature of trade. For example, trading companies require a huge amount of working capital as it stocks huge quantities of goods. Whereas, the working capital requirement for a manufacturing company is much lesser.\u00a0<\/span><\/p>\n<ul>\n<li aria-level=\"1\"><b>Business Cycle<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The business cycle also has a huge impact on the working capital needs of a business. Seasonal businesses require additional working capital to expand the business during seasonal booms.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Businesses also require working capital to meet the needs of increased sales. In such cases, they borrow money or take loans to fulfil the demand.\u00a0<\/span><\/p>\n<ul>\n<li aria-level=\"1\"><b>Production Cycle<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The production cycle or the operating cycle is the time it takes to produce the final product from raw materials.\u00a0 It has a huge impact on the working capital requirement of a company.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, businesses that have a longer production cycle need much more working capital to meet their operational needs. In other words, the increased production cycle is directly proportional to the need for the working capital of a company.\u00a0<\/span><\/p>\n<ul>\n<li aria-level=\"1\"><b>Operational Efficiency<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The operational efficiency of businesses depends on a lot of factors such as short production cycles, quick sales and shorter debt collection periods. Each business achieves this operational efficiency by managing its working capital.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Businesses that are operationally efficient need to invest less in working capital. Similarly, businesses that are not operationally efficient need to invest in working capital.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Did-you-know\"><\/span>Did you know?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><a href=\"https:\/\/razorpay.com\/blog\/business-banking\/working-capital-loan-small-business\/\">Razorpay is disrupting working capital loan processes for MSMEs<\/a> through its collateral-free working capital loans . This product is designed to meet the short-term working capital requirements of MSMEs such as salaries, infrastructure overheads, procurement of raw materials and much more.<\/p>\n<div style=\"text-align: center;\"><a style=\"border-radius: 3px; background: #528ff0; padding: 15px; font-weight: 600; cursor: pointer; text-decoration: none; color: white;\" href=\"https:\/\/razorpay.com\/capital\/working-capital-loans\/?utm_source=Content&amp;utm_medium=Blog&amp;utm_campaign=Capital+Fuel%3A+Types+of+Working+Capital+Explained\" target=\"_blank\" rel=\"noopener noreferrer\">Get Working Capital Loan<\/a><\/div>\n<p>&nbsp;<\/p>\n<p><strong>Read more:<\/strong><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/current-account-opening-documents-required\/\"><span style=\"font-weight: 400;\">Current Account Documents<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/blog\/business-banking\/what-is-current-account\/\"><span style=\"font-weight: 400;\">What is Current Account<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/what-is-a-business-account-for-startups\/\"><span style=\"font-weight: 400;\">Business Account<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/mab-monthly-average-balance-current-account\/\"><span style=\"font-weight: 400;\">Monthly Average Balance<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/blog\/business-banking\/zero-balance-current-account-business\/\"><span style=\"font-weight: 400;\">Zero Balance Current Account<\/span><\/a><\/p>\n<p><a href=\"https:\/\/razorpay.com\/learn\/business-banking\/types-of-current-accounts\/\"><span style=\"font-weight: 400;\">Types of Current Account<\/span><\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\t\t\t<div id=\"rank-math-rich-snippet-wrapper\" class=\"\">\n\n\t\t\t\t\n\t\t\t<\/div>\n\t\t\n","protected":false},"excerpt":{"rendered":"<p>Working capital is the liquidity available to a company to carry out its day-to-day expenses. Two fundamental elements of business affecting working capital are current assets and current liabilities. The short term financial position of a business can be determined by analysing these two metrics. There are many types of working capital depending on its<\/p>\n","protected":false},"author":151156542,"featured_media":8095,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3437,3643],"tags":[3663,3445],"class_list":{"0":"post-8094","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-banking","8":"category-capital","9":"tag-types-of-working-capital","10":"tag-working-capital"},"_links":{"self":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8094","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/users\/151156542"}],"replies":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/comments?post=8094"}],"version-history":[{"count":8,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8094\/revisions"}],"predecessor-version":[{"id":10321,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/posts\/8094\/revisions\/10321"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media\/8095"}],"wp:attachment":[{"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/media?parent=8094"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/categories?post=8094"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/learn.razorpay.in\/learn\/wp-json\/wp\/v2\/tags?post=8094"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}