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What are the types of working capital policies?

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What are the types of working capital policies?

There are certain policies that must be followed while calculating and managing working capital. The most commonly followed working capital policies are:

1. Aggressive Policy
This policy, as the name suggests, is a high-risk one. Owing to the risk factors, returns are also higher. To follow this, a business must minimise its current assets or the amount of debt its owed to.

Here, there are no debtors- payments are collected in time and are eventually invested in business. Creditors’ payments are delayed to the maximum. Doing so, sometimes might land up with possibilities to sell out company assets to clear debts.

This type of working capital policy is mostly followed by companies looking for brisk growth.

2. Conservative policy
Businesses with low-risk appetite are mostly inclined towards such a policy. In this policy, credit limits are pre-set to a specific amount. Also, such policies refrain doing business on credit with any debtor who defaults.

Generally, a conservative working capital policy is followed to keep the company assets and liabilities in sync with each other, with the assets value on the higher side, in case of sudden exigencies.

3. Matching policy
This one is a hybrid between a working capital management policy and a working capital financing policy.

Businesses generally follow this policy when they want their working capital to be less; thereby utilizing or investing the money elsewhere.

Here, the current assets of the balance sheet are matched with the current liabilities and less cash is kept in hand. This in turn, enables the rest of the finance to be used for expanding business, increasing production scale, etc.

A sound working capital financing policy enables a firm to select a working capital loan as per its needs.

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