Classification of Working Capital

Before turning our attention to the way working capital should be financed, we need to take a slight detour and classify working capital. Having defined working capital as current assets, it can now be classified according to

• Components, such as cash, marketable securities, receivables, and inventory (subsequent chapters will focus on these components), or

• Time, as either permanent (постоянные, неизменный) or temporary.

Though the components of working capital are self-explanatory, classification by )- time requires some explanation. A firm's permanent working capital is the amount of current assets required to meet long-term minimum needs. You might call this "bare bones" working capital. Temporary working capital, on the other hand, is the investment in current assets that varies with seasonal requirements. Figure 8-2 illustrates the firm's changing needs for working capital over time while highlighting both the temporary and permanent nature of those needs.

Permanent working capital is similar to the firm's fixed assets in two important respects. First, the dollar investment is long term, despite the seeming contradiction that the a eta being financed are called "current." Second, for a growing firm, the level of permanent working capital needed will increase over time in the same way that a firms fixed asset w ill need to increase over time. However, permanent working capital is different from fixed assets in one very important respect It is constantly changing. Take a can of red paint and paint some of the firms fixed assets and they are still red. Now, paint the firm's cash, receivable invoices, and inventory green. If you come back in a month, you may still find some green items, but many not most, will have been replaced by new, unpainted items. Thus, permanent working capital does not consist of particular current assets staying permanently in place but is a permanent level of investment in current assets, whose individual item constantly turning over. Viewed still another way, permanent working capital is similar to the level of water that you find in a bay at low tide.

Like permanent working capital, temporary working capital also consists of current assets in a constantly changing form. However, because the need for this portion of the firm's total current assets is seasonal, we may want to consider financing level of current assets from a source which can itself be seasonal or temporary in nature. Let us now direct our attention to the problem of how to finance current assets.

SHORT-TERM AND LONG-TERM MIX

The way in which the assets of a company are financed involves a trade-off between risk and profitability. For purposes of analysis, we initially assume that the company has an established policy with respect to payment for purchases, labor, taxes, and other expenses. Thus, the amounts of accounts payable and of accruals included in current liabilities are not active decision variables. These current liabilities are regarded as spontaneous financing - trade credit, and other. They finance a payables and accruals ([накопленные] обязательства [расходы] (затраты, которые будут оплачены до конца отчетного периода, но еще не выплачены; в балансе относятся к краткосрочным обязательствам)) that arise spontaneously in the firm's day-to-day operations. They finance a portion of the current assets of the firm and tend to fluctuate with the production schedule and, in the case of accrued taxes, with profits. As the underlying investment in current assets grows, accounts payable and accruals also tend to grow, in part ported by spontaneous financing are handled This residual financing requirement pertains to the net Investment in assets after spontaneous financing is deducted.