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Hello, I am trying to understand what exactly are permanent and temporary current assets. I have researched but I am getting conflicting info. (increases with sales vs doesn’t increase with sales) . Could you please explain using examples?..thanks.
I came across this while reading up on funding policies ( aggressive, conservative , matching).
What is means is this:
Suppose for my business, on average my working capital is $20,000 (and this level is reasonable for my business).
Because it is only an average, some days it will be higher and some days it will be lower, maybe it fluctuates between $15,000 and $25,000.
However it does need financing.
We could finance it all from short-term finance (aggressive) and borrow day-by-day the amount we need. Alternatively, we could borrow the maximum ($25,000) from long-term finance (this way we would always have enough, but sometimes more than we actually need) – this is conservative.
Perhaps the most sensible way would be to borrow the long-term average need ($20,000) from long-term finance, and whenever we need extra the use short-term finance for the extra.
The long-term average need is called ‘permanent’ working capital. The short-term extra needs are called ‘temporary’ working capital.
(There is certainly no rule about this – in fact another way would be to borrow $15,000 (the minimum) from long-term and then any extra from short-term).
Hope that makes sense 🙂
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