Three Working Capital Financing Strategies
Just as there are different types of working capital financing, different strategies and approaches can be used to manage the working capital of a business.
The most applicable approach will depend on the specific circ*mstances surrounding your business.
Below arethree working capital strategiesbusinesses should adapt based on their credit score, industry, business size, working capital turnover ratio, and financial goals:
Working Capital Strategies depend on the company profile
Conservative Approach –As the name speaks for itself, this strategy finances working capital with low risk and profitability.
Working capital financing will primarily be secured through long term solutions in these instances. For example, equity funding, term loans or long-term securities like debentures.
This strategy also finances a portion of your temporary working capital. Temporary working capital is the net working capital variation curve above permanent working capital.
Companies with high cyclical variances such as tourism or farming may adopt this approach.
This methodology helps buffer against insolvency risks.
Aggressive Approach –Conversely, an aggressive approach involves extensive utilisation of short-term financing options.
An aggressive approach aims to speed up your business cycle and reduce idle assets that generate unnecessary costs.
Although there are efficiency advantages associated with this approach, it is incredibly high risk compared to a conservative strategy.
Hedging Approach –Perhaps the most sensible, utilitarian and most frequently adopted approach.
This involves using long term financing methods to account for fixed assets and permanent working capital.
The graphical representation below, gives you a better understanding of how the three working capital strategies work.
Long- and short-term strategies are used to overcome temporary and permanent working capital needs.
Conservative, Hedging, and Aggressive, are working capital financing strategies used by companies
There is no universal financing solution, so make sure you understand your circ*mstances before formulating a plan for your business.
A business needs to understand its working capital at every stage of the business cycle.
