Working Capital Policies

Know more about Types of Working Capital Policies

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Working capital keeps the daily operations of a business functional. You can calculate your company’s working capital by subtracting the current liabilities, such as short-term loans or payments to suppliers, from the current assets. Monitoring your firm’s working capital is important to the firm’s operations. Unsatisfactory working capital numbers can also be an indication of resource mismanagement within the organisation. It is, therefore, important to have a working capital policy for your business. A working capital policy helps the business owner ensure that they get the most out of the working capital on hand.

What are the Three Working Capital Policies

1. Conservative Policy

This form of a working capital policy is considered to be the safest one. Here, the focus is on having a reserve of current assets that allows you to clear current liabilities with ease. A part of this policy also dictates that you should have enough current assets in hand to take care of emergencies. While it, theoretically,

does leave the proprietor with more than sufficient funds, you must be cognizant of the fact that you will be left with a significantly lesser amount of monetary resources for reinvestment. Generally, business people, who are complacent with the scale of their establishment or are trying to survive economically challenging times, tend to resort to this form of working capital policy.

2. Aggressive Policy

This working capital policy is suited for companies that are in a secure position. With an aggressive working capital policy, business owners reserve a relatively small amount of current assets and run the activities that they would need the working capital for on credit.

A business owner who follows the aggressive policy establishes terms that allow them to repay the creditors as late as possible and collect dues from debtors as early as possible. When they are able to achieve these parameters successfully, the business owners maintain minimal working capital and proceed with their expansion as planned. It is generally termed a high-risk policy; so, the proprietor must be sure to weigh the reward against their ability to absorb or bear risk.

If, at any point in time, they develop an opinion that their firm is in need of working capital, they can rely on a tailor-made business loan as per the provisions of their working capital policy.

3. Matching Policy

If you are running a steady, well-established business, you are likely to be comfortable with the prospect of taking risks. In that case, you can go for a matching working capital policy. Under a matching working capital policy, the business keeps its current assets almost at par with its current liabilities.

Ideally, a company which is gaining momentum in the market and is on the verge of entering into a new phase of growth should adopt a matching working capital policy. If you follow the matching policy, you will always have a greater amount of liquid assets at your disposal, which you can then invest into the expansion of your firm.

Which Working Capital Policy is Right for You

The kind of working capital policy that you should choose depends upon your plans for business growth. Hence, it is advisable for you to choose one wisely. Give these three working capital management policies a serious thought before you pick one that aids your business endeavours. Re-evaluate your approach every financial year to ensure that you are doing what’s best for your firm.

If you are looking to follow an aggressive working capital policy or find yourself in a situation that requires you to raise working capital funds, you can take a look at the working capital loan options available at Bajaj Markets.