Fixed Working Capital Definition
Fixed working capital is defined as the minimum level of investment in current assets that a company must have to continue its operations and meet its short-term financial obligations. It is also known as permanent or core working capital.
A company’s fixed working capital requirements are determined by its production process and operating cycle. The operating cycle is the length of time it takes to convert raw materials into finished goods and then sell those goods. The longer the operating cycle, the more working capital a company needs.
A company can finance its fixed working capital needs with long-term debt, equity, or a combination of both. Equity financing is often preferred because it does not require the company to make payments on the principal until the funds are actually needed. However, long-term debt may be necessary if a company cannot raise enough equity to finance its fixed working capital needs.
