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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

In working capital management, the term 'permanent working capital' (also called fixed working capital) refers to:

Permanent working capital is the minimum level of current assets a firm must hold continuously, regardless of seasonal changes in sales or production. It is needed for the business to operate at all. The extra requirement in peak periods is temporary or variable working capital, which is a different concept.

  1. AThe minimum level of current assets that a firm must hold at all times, whatever the seasonal swings in activityCorrect
  2. BThe extra current assets built up only during the peak season and released afterwards
  3. CThe excess of fixed assets over long-term sources of finance
  4. DThe cash balance kept aside for paying dividends and taxes

Explanation

Permanent working capital is the floor level of current assets (stock, debtors, cash) needed to carry on business continuously. The extra amount needed in busy seasons is temporary or variable working capital, which is what the second option describes. Fixed assets and dividend reserves are unrelated to this concept.

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