Choosing a working capital policy depends on the level of risk you can manage. A conservative policy matches business assets and liabilities, a matching policy leaves more cash to reinvest, and an aggressive policy allows for rapid growth but carries high risk.
It can be difficult to choose the best working capital policy, and the policy that works best for another business owner may not be the best for you. In general, however, the best policy may be one that has a level of risk that you can manage. A conservative working capital policy may prove to be best for you if you want to keep your risk low. A matching policy, on the other hand, carries a medium level of risk but also leaves you with more cash to reinvest in your business. An aggressive working capital policy is considered the higher risk, but it can result in more funds being reinvested in your business.
A matching type of policy may prove to be the best option if you want to have a significant amount of money available to reinvest in your business but don’t want to take on an extremely high level of risk. With this policy, you ensure that your business assets are matched with your business responsibilities. You plan on having cash to pay off creditors when payments are due, but in the meantime, you can reinvest available funds in hopes of increasing profits for your business.
If you prefer a less risky policy, you can choose a conservative plan. If so, you’ll typically match business assets and liabilities in order to make sure you have the money to pay your creditors. To reduce risk, however, it is also possible to withhold additional assets in order to have cash available for unforeseen circumstances. While you may prefer this working capital policy because it carries little risk, choosing it can mean you have less money for business growth.
An aggressive working capital policy can allow you to grow your business rapidly, but it carries a high level of risk. In that case, collect the funds owed to you quickly and delay paying your creditors for as long as possible. With this plan, you can use the money you receive from debtors and the money you owe creditors to boost productivity and enable rapid business growth. This can allow you to see increased sales and profits faster than usual. However, it could also force you to sell assets or seek other sources of financing in the event that a creditor requests payment sooner than expected.
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