It can be difficult to choose the best working capital policy, and the policy that works best for another businessperson may not be best for you. In general, however, the best policy may be the one that features a level of risk you can handle. A conservative working capital policy may prove best for you if you want to keep risk low. A matching policy, on the other hand, entails 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 highest risk but may translate into more funds to reinvest 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 make sure that your business assets are matched with your business liabilities. You plan so that you will have money to pay your creditors when your payments are due, but you may reinvest the funds on hand in the meantime in the hopes of increasing profits for your business.
If you prefer a less risky policy, you may choose a conservative plan. In such a case, you will typically match your business assets and liabilities in order to make sure you will have the money to pay creditors. To reduce risk, however, you may also retain additional assets for the purpose of having money available for unforeseen circumstances. While you may prefer this working capital policy because it involves little risk, choosing it may mean you have less money for business growth.
An aggressive policy for working capital may allow you to grow your business quickly but involves taking on a high level of risk. In such a case, you collect funds you are owed quickly and delay paying 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 afford quick business growth. This may allow you to see an increase in sales and profits faster than usual. It may, however, also force you to sell assets or look for other sources of funding in the event a creditor demands payment sooner than you expected.
