January 26, 2022

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Permanent Working Capital Meaning and Key Explanations

Permanent Working Capital Meaning and Key Explanations
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Permanent working capital should be maintained by every business. This form of capital can be known using statistical tools or by personal judgment. More so, it helps in determining WC financing. In this article, let’s stress this term.

Definition of Permanent Working Capital

Permanent working capital means the part of a firm’s net working capital that remains the same over time within a year. It can also be referred to as the minimum WC required to run a business daily.

Key Explanations on Permanent Working Capital

It is a constant part of the working capital. If you start running a business in January and compute your NWC every month, you can easily identify your permanent working capital. This will be the lowest working capital for the year. Any amount higher than this figure became variable working capital. This will be discussed in another article. Also, the screenshot below explains this further.

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This working capital may increase or decrease over time. This is true, especially in a growth company. Over the long-run period, say every year, the net working capital grows constantly. In a graph, this will form a linear curve. This helps differentiate a growth company from a company that is at its peak in its life cycle.

Identifying this WC can help in financing. When working capital is fixed, the company management can use long-term sources of financing. This includes capital, loans if more than 6 months, and debt capital (for example corporate bonds).

Note that working capital is required to meet a business’s daily operation. If a business does not have adequate working capital it will lead to embarrassment. The entity will not be able to meet day-to-day obligations as and when due.

Conclusion

It is the minimum investment in WC a business needs to meet daily operations. Knowing the value of it can aid the business in deciding on WC financing. PWC is mostly constant, therefore referred to as fixed working capital.

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