Working Capital Policy Definition

A working capital policy is a set of guidelines that a company uses to manage its short-term financing and investments. The goal of a working capital policy is to ensure that the company has enough cash on hand to meet its short-term obligations, while also maximizing the return on its investments.

There are two main components of a working capital policy: the cash conversion cycle and the level of risk tolerance. The cash conversion cycle is the amount of time that it takes for a company to convert its inventory into cash. The level of risk tolerance reflects how much variability the company is willing to accept in its cash flow.

A well-designed working capital policy will strike a balance between these two factors, ensuring that the company has enough cash on hand to meet its obligations, while also investing in activities that will generate returns in the future.