Temporary Working Capital vs Permanent Working Capital

Banking & FinanceFinance ManagementGrowth & Empowerment

The major differences between Temporary and Permanent working capital are as follows −

Based on Needs

Temporary and permanent working capital differ in terms of their need. The permanent working capital is a fixed amount of working capital that is kept fixed for the long-term needs of the business. The temporary working capital, on the other hand, is meant for day-to-day, short-term expenses.

Temporary working capital is an additional amount of capital kept reserved above the permanent working capital. Therefore, permanent working capital is a large amount of capital while temporary capital is a smaller amount of capital.

Based on Usage

Temporary working capital is the fund that is variable and depends on the current needs from time to time of an organization. The permanent working capital is fixed and used for a specific task in the future. In fact, temporary working capital is a current asset saved for the day-to-day needs of a business.

For example, meeting day-to-day expenses, such as operational costs are managed by temporary working capital. The expenses for machinery, land, and building in the future are met by permanent working capital.

Based on Dependency

Temporary and permanent working capital also differ in terms of their variable factors. The temporary working capital is dependent on variable costs while the permanent working capital is independent of variable costs.

The reason for this is that the permanent working capital is formed with a fund that is meant for certain future use while temporary working capital is meant for the general expenses of a firm. Therefore, temporary working capital depends on the general variable costs while permanent working capital does not depend on any variable.

Based on Stability

Temporary working capital may fluctuate and become unstable while permanent working capital is stable and does not fluctuate. While running a business, many different types of short-term needs may arise which are met by short-term temporary working capital. That is why it is uncertain and may fluctuate greatly. Permanent working capital is a fixed amount and is not related to any fluctuations.

Based on Financing

Temporary working capital is financed by short-term funds while permanent working capital is financed by long-term funds. It is a nature of temporary funds to be short-term in nature.

Therefore, it is used for the temporary needs of the businesses. Permanent working capital is larger in nature and it cannot be financed by short-term funds.

Based on Categories

Temporary working capital is categorized into seasonal and special working capital. Seasonal working capital is funds that are dependent on seasons, such as weather conditions while special working capital is funds that are meant for special purposes, such as company events and shows.

Permanent working capital is further divided into regular working capital and reserve working capital.

Regular working capital is meant for the general, regular expenses that may arise due to operations. Reserve working capital is the fund that is kept reserved for a special purpose, such as buying new machinery.

Based on General Utilization

Temporary working capital funds utilize short-term variable funds while the general utilization of permanent working capital is in fixed assets. As the temporary working capital is meant for general purposes, they are more current in nature.

The permanent working capital is used for larger expenses so they are usually fixed and long-term in nature. Temporary working capital is usually meant for general expenses, so they must be met regularly. Permanent working capital is time sensitive and may be needed in the case of bigger expenses.

Conclusion

Businesses always need working capital to run their businesses. Working capital helps businesses stay afloat and swim through day-to-day expenses apart from meeting their goals in the long-term. Depending on the nature of the working capital, they are divided into temporary and permanent working capital.

raja
Updated on 29-Jun-2022 13:13:43

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