Working capital is the money that helps you finance your company’s everyday operations. It is the backbone of any firm, regardless of its nature or size; hence managing it is essential. You can arrive at your company’s working capital by subtracting current liabilities such as short-term loans or payments to suppliers from the current assets. This is important because a shortage of working capital is far from ideal. It can throw a spanner in your company’s productivity, indicates mismanagement of resources and has the potential to slow down the speed at which your company can work and grow.
Avoid this kind of scenario and give serious thought and attention to working capital management. Before you determine the method you will use to calculate working capital, pick a working capital policy. This will ensure that you are getting the most out of your working capital management efforts.
Matching policy
If your business is well-established, you are likely to be comfortable with the prospect of taking on risks. In such a situation, you can opt for a matching policy. Here, your current assets are just enough to pay your current liabilities, and your working capital is lean. This type of working capital policy is ideal if your company gathers momentum and breaks into a new growth phase. You will have a larger sum of money to re-invest into your business by holding back your working capital.
Aggressive policy
This working capital policy is more nuanced, and again, it is best suited for companies that are in a secure position. It includes reserving a small amount of current assets, establishing terms with creditors that allow you to repay them as late as possible, and collecting money due to you from debtors as soon as possible. When you are able to achieve these three parameters successfully, you will be able to maintain minimal working capital and further your business’ growth. It is a high-risk policy, so be sure to weigh the reward of substantial gains against your company’s ability to absorb risk.
If you find at any point that your firm is lacking working capital, as per the provisions of your working capital policy. In that case, you can always rely on a tailor-made business loan, such as a working capital loan from Bajaj Finserv. Here, you can get up to 80 lakh without collateral, with approval in just 24 hours.
Conservative policy
As the name suggests, this working capital policy is the safest one. Here, your focus should be to have a reserve of current assets that allows you to clear current liabilities, as well as take care of any emergency that may come your way. While it does leave you with ample funds to tackle any situation, do remember that you will certainly have a lesser amount to re-invest in your business. So, evaluate your company’s growth plan before you choose this working capital policy.
Give these three working capital policies serious consideration before you pick one for your business. Make sure that you re-evaluate your approach every financial year to ensure that you’re doing what’s best for your firm.
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