Coin Tower

Fixed vs. variable working capital – what’s the difference?


A business requires working capital to be able to pay its bills and debts in a timely manner. Adequate working capital is an indication of solvency, which is necessary to settle bills promptly, pay the salaries and wages of employees, and settle any due debts, avoiding the incurrence of penalties, interest and fines. The calculation for working capital is the deduction of current liabilities from current assets.

Fixed working capital

Fixed or permanent working capital is split into two types: reserve margin and regular working capital. Regular working capital is the assets needed by a company to maintain business activities, from cash to inventory, to receivables and back to cash again. The reserve working capital is the excess working capital, rather than the amount required for daily operations.

The name ‘fixed working capital’ is a little misleading, as the amount can change at any time, and can be affected by company expansion and the business cycle.

Variable working capital

Working capital requirements vary throughout the year, and may be dependent on seasonal highs and lows in trading. Some periods of the year may experience slow trading, with fewer sales, which will result in less capital being required for raw materials, production and other costs associated with running a business.

Variable working capital is the amount needed in excess of fixed working capital. At peak times, more variable capital will be required to maintain the business activities.

Variable working capital can be split into two categories: seasonal and special working capital. Seasonal is the amount needed to meet demands such as summer or Christmas, while special working capital is needed to meet one-offs.


Funding sources vary for variable and fixed working capital. Fixed working capital is generally sourced from a long-term source, although this isn’t always the case. Variable working capital is usually funded from a short-term source.

Long-term funding sources may include equity, retained earnings, long-term loans and debentures. Short-term funding includes trade or bank credit, factoring, sale of fixed assets, commercial paper, and bills of exchange. Each of these funding sources may be more suited to specific companies and their circumstances. Financial accounting services will often provide a professional approach to funding.

Working capital is a complex area and may require professional assistance to help manage the business requirements. If you would like to discuss working capital and its impact on your company, call us to arrange an informal chat.