Working capital is the money that keeps the daily operations of a business going. Business experts, over the years, have christened working capital to be the “life blood” of a business establishment.
You can always arrive at your company’s working capital by subtracting the current liabilities, such as short-term loans or payments to suppliers, from the current assets. These are the immediate expenses and incomes that are either incurred or generated by your business, respectively.
Monitoring your firm’s working capital is important because a shortage of funds is a far from ideal situation. Unsatisfactory working capital numbers can also be an indication of resource mismanagement within the corporate establishment. Hence, managing your working capital can save you from operational bottlenecks. However, before determining the method to compute the working capital, it is important to pick a suitable working capital policy. A working capital policy will help the business owner ensure that they get the most out of the working capital on hand.
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 cognisant of the fact that you will be left with a significantly lesser amount of monetary resources for re-investment. 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.
This working capital policy is a more nuanced version of the conservative policy. However, it 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 allows her/him to repay creditors as late as possible and collect dues from debtors as soon as possible. When they are able to achieve these parameters successfully, the business owners will be able to maintain minimal working capital and proceed with their expansion as planned. It is generally termed as 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.
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. A matching working capital policy could be defined by keeping your current assets almost at par with your current liabilities.
Ideally, a company that has adopted this policy is gaining momentum in the market and is almost on the verge of entering into a new phase of growth. 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.
The kind of working capital policy that you choose will depend 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 on Finserv MARKETS.
Through our lending partners, you can secure a loan for as high as ₹75 Lakhs without having to keep any of your possessions as collateral. So apply for a Business Loan on Finserv MARKETS if you need funding. The application procedure is hassle-free and convenient. Apply today!