Choosing the best working capital policy depends on your risk tolerance. A conservative policy is low risk, while a matching policy balances risk and cash availability. An aggressive policy can lead to rapid growth but involves 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 one for you. In general, however, the best policy may be one that presents a level of risk that you can handle. A conservative working capital policy may be best for you if you want to keep risk low. A matching policy, on the other hand, carries a medium level of risk, but it also leaves you with more money to reinvest in your business. An aggressive working capital policy is considered higher risk but can translate into more funds to reinvest in your business.
A matching type of policy may be the best option if you want to have a significant amount of cash 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 against your business liabilities. You plan to have cash to pay your creditors when payments come due, but you can reinvest available funds in the meantime, hoping to increase profits for your business.
If you prefer a less risky policy, you can choose a conservative plan. In that case, you’ll typically match your business’s assets and liabilities to ensure you’ll have cash to pay creditors. To reduce risk, however, you may also retain additional assets for the purpose of making cash available for unforeseen circumstances. While you may prefer this working capital policy as it involves little risk, your choice may mean you have less cash for business growth.
An aggressive working capital policy can allow you to grow your business quickly, but it involves taking a high level of risk. In this case, you receive the funds owed to you quickly and delay the payment of 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 increase productivity and enable rapid business growth. This can allow you to see an increase in sales and profits more quickly than usual. However, this could also force you to sell assets or look for other sources of funding if a creditor demands payment sooner than expected.
Asset Smart.
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