Estimating Temporary and Permanent Working Capital to Discern a Firm’s Asset Financing Strategy

Abstract

Working capital management, specifically managing the distinction between temporary and permanent working capital in the context of a firm’s asset financing strategy, is an important topic in corporate finance. But academic research has given little attention to this distinction, and finance textbooks typically note the distinction only conceptually without attempting to measure the two categories of working capital. This study estimates the two categories of net operating working capital (NOWC) for a quasi-fictional firm based on data from the firm’s year-end financial statements over a three-year period. The results suggest the firm’s NOWC was largely permanent and the firm was following a non-matching aggressive asset financing strategy over the study period. However, potential bias due to possible adjusting of year-end working capital calls for further research into the mix of temporary and permanent working capital.