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3 policies to keep in mind when planning your business’ working capital

  • Highlights

  • A working capital policy aids in working capital management

  • Your company’s risk appetite will help you choose the right policy

  • Choose a matching or aggressive policy if you have a moderate risk appetite

  • A conservative policy reserves your current assets

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, and so, managing it is equally 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.

To avoid such a scenario from affecting your company’s bottom line, it is important that you give working capital management serious thought and attention. Before you determine the method, you will use to calculate working capital, you must 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 risk. 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 is gathering momentum and is breaking into a new phase of growth. By holding back on the working capital, you will have a larger sum of money to re-invest into your business.

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, 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 Rs.30 lakh without collateral, with approval in just 24 hours.

Benefits of Working Capital Finance for your Business

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 situation 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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