Permanent working capital is a reliable and consistent income stream that businesses cultivate and maintain as the foundation for continued operation. It is important to assess and maintain this capital to cover operating expenses and debt obligations. The sources of this capital can change, so ongoing efforts are necessary to ensure sufficient financial resources. If the principal falls below the minimum amount required, expenses can be reduced and new income generated to maintain the capital.
Permanent working capital is 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. Businesses tend to cultivate and maintain sources of permanent working capital as the foundation for their continued operation from year to year.
The exact criteria used to define what is and is not permanent working capital will vary slightly from business to business. A general understanding is that this form of working capital is often the base level of current assets held by the business, using the accounts receivable balance as an example. In some businesses that provide services to customers primarily on a contractual basis, the income generated month-to-month under the terms of those contracts may be considered permanent working capital. Any customer who chooses to purchase services on a one-time basis, with no guarantees of repeat business, would be considered a source of temporary working capital.
Identifying the requirements for permanent working capital is extremely important for a business. The idea is to make sure there are reliable and consistent income streams and provide the resources to keep the company current on its debt obligations and allow the company to continue operating. Doing so makes it easier to develop realistic operating budgets, plan for special expenses for marketing or other expansion projects that may not be included in an operating budget, and to set aside resources in some type of contingency or emergency operating fund.
Assessing the current state of permanent working capital is an ongoing effort. This is because the sources of that capital can change from time to time. The balance of accounts receivable may increase or decrease, depending on the acquisition or loss of regular customers. Contracts can be terminated or renegotiated at lower rates to maintain the business relationship. By keeping abreast of the current state of this capital, a company can ensure that these financial resources are sufficient to cover current operating expenses.
If principal falls below the minimum amount required, steps can be taken to reduce various expenses before contingency resources are exhausted. This often requires taking a close look at those expenses and finding ways to cut costs without jeopardizing quality or production rate. At the same time, an effort should be made to generate new income that qualifies as permanent working capital, with a chance to approach sources of temporary working capital and determine if there is a way to convert that cash flow into something more consistent. and confiable.
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