What is permanent working capital?

permanent working capital is a term used to identify the portion of working capital that is expected to be generated on a constant and uninterrupted basis. This is in contrast to temporary working capital, which is income from sources that may or may not continue. Companies tend to cultivate and maintain sources of permanent working capital as the basis for their ongoing operation from year to year.

The exact criteria used to define what is and what is not permanent working capital varies slightly from company to company. A general understanding is that this form of working capital is often the basic level of current assets held by the business, such as the balance of accounts receivable. In some businesses that provide services to customers primarily on a contractual basis, the revenue generated month-to-month under the terms of these contracts may be considered permanent working capital. Any customer who chooses to purchase services in one go, with no guarantees of repeat business, would be considered a source of temporary working capital.

Identifying ongoing working capital requirements is extremely important for a business. The idea is to ensure reliable and consistent revenue streams and provide the resources to keep the company current on its debt obligations and allow the business to continue operating. This makes it easier to develop realistic operating budgets, plan special spending for marketing or other expansion projects that may not be included in an operating budget, and set aside resources in some sort of contingency or emergency operating fund.

Assessing the current state of permanent working capital is an ongoing effort. This is because the sources of this capital may change from time to time. The accounts receivable balance may increase or decrease depending on the acquisition or loss of recurring customers. Contracts may be terminated or renegotiated at lower rates to maintain the business relationship. By tracking the current status of permanent working capital, a company can ensure that these financial resources are sufficient to cover current operating expenses.

If capital falls below the minimum required amount, steps can be taken to reduce various expenses before contingency resources are exhausted. This often requires careful analysis of these expenses and finding ways to cut costs without compromising quality or production rate. At the same time, an effort should be made to generate new income that qualifies as permanent working capital, with the opportunity to address sources of temporary working capital and determine if there is any way to make that cash flow more consistent and reliable. . .

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