Permanent and Temporary Working Capital
The operating cycle, thus, creates the need for current assets (working capital). However, they does not come to an end after the cycle is completed. It continues to exist. To explain this computing need of current assets, a distinction should be drawn between permanent and the working capital.
Any amount over and above the permanent level of working capital is temporary, or variable working capital. This portion of the required working capital is needed fluctuations in demand consequent upon changes in production and sales as a result of changes. The basic distinction between permanent and temporary working capital is illustrated in Figure.
Both kinds of working capital are necessary to facilitate the sales process through the operating cycle. Temporary working capital is created to meet liquidity requirements that are of a purely transient nature.