Working Capital Policies Explained in Full Depth: Net & Gross Both

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Working capital (WC) denotes a company’s ability to pay its current liabilities with the help of its currents assets. Current liabilities in this aspect include expenses and debts which the company is bound to pay within a year or a business cycle.

It consists of all indispensable costs required to run a business, such as rent, raw material, equipment, interest payable on debts, and so on.


On the other hand, current assets include everything (both tangible and intangible) a company owns. Cash, payments receivable, and marketable securities like bonds, mutual funds, etc. qualify as current assets of a company.

Working capital can be broadly viewed in two categories –

  • Balance sheet view of working capital.
  • Operating cycle view of working capital.

Under the balance sheet view of working capital, gross working capital and net WC are the two types of WC. One of the rules to build a successful business is to shorten the WC cycle.

The quicker a business is able to turn its net current assets and liabilities into cash, the healthier and stronger business is. This is why working capital finance is necessary for small businesses as well as big businesses.

Different types of working capital policies

An entrepreneur has to follow certain policies while managing WC in a business. The most commonly practiced WC policies are as follows –

  1. Aggressive policy

This policy is ideal for companies which hold a secure position in the market. An aggressive WC policy is all about reserving a part of current assets, convincing the creditors to let you repay debts as late as possible and collecting dues from debtors as soon as possible.

Once these three parameters are fulfilled, a company manages to maintain minimal WC needed to finance further business growth. In case there is still a shortage of funds, an entrepreneur can apply for external financing such as a business loan.

  1. Balanced policy

Companies usually choose to follow this policy when they are looking to maintain low WC and instead invest the money for some other purposes.

Under this policy, the business owner tries to match the current assets of the balance sheet with the current liabilities, keeping less cash in hand. Remainder available funds can be utilised in expanding business operations, increasing production, etc.

  1. Conservative policy

Companies which tend to bear low risks generally follow this WC policy. Here, the credit limits are pre-set. It requires a company to keep its net assets in proper sync with its net liabilities, with assets holding higher value than liabilities.

Different types of working capital

Working capital is of the following two types –

  1. Gross working capital

This is the sum of all the current assets of a company, which can be converted into cash within a year or less. It includes assets such as cash, inventory, marketable securities, short-term investments, payments receivable, and so on.

  1. Net working capital

It is also known as operational capital of a company, which measures the short-term liquidity of a firm. Net working capital is the aggregate of current assets and current liabilities in a business enterprise.

While running a business, it is essential to maintain the cycle of WC properly. Entrepreneurs, at all times, have the option to avail funds from financial companies to ensure that net, as well as gross working capital in the company, are optimum levels. The criteria for business loan application are mostly simple and easy to fulfil.

Financers such as Bajaj Finserv additionally provide pre-approved offers which help avail business loans easily and in less time.

Irrespective of which working capital policy a company is following, it is vital to maintain and keep a check on it at all times. This will help the company avoid financial deficiencies at the earliest.

 

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By @TheInscriberMag

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