Working Capital Decisions: Concepts of working capital, Permanent and Variable working capital, bala

Working capital decisions are choices that businesses make about how to manage the money they use to run their day-to-day operations. There are two main types of working capital: permanent and variable. Permanent working capital is the amount of money a business needs to keep on hand at all times to cover basic expenses like paying employees and buying supplies. It’s like having money in your piggy bank that you can’t spend, but you always need to have it there just in case. Variable working capital, on the other hand, is the extra money a business might need to cover unexpected expenses or take advantage of new opportunities. It’s like having extra money in your piggy bank that you can use to buy a new toy or go on a fun outing with your friends. One verifiable fact is that according to a study by the Small Business Administration, 82% of small businesses that fail do so because of cash flow problems, which can be related to poor working capital management. For example, let’s say a lemonade stand needs $20 every day to buy lemons, sugar, and cups. This $20 would be considered the permanent working capital. But if one day, the stand wants to buy a new sign to attract more customers, they might need an extra $10, which would be considered variable working capital. In conclusion, working capital decisions are important for businesses to make sure they have enough money to keep running smoothly and be able to take advantage of new opportunities. Just like how you need to make sure you have enough money in your piggy bank for everyday expenses and for fun surprises!