1. WORKING CAPITAL POLICIES
A company needs to closely monitor its working capital levels in order to keep its cash requirements firmly
in check. It can do this most effectively by instituting and enforcing a number of policies. The following
working capital policies are sorted by the component of working capital that they most directly affect.
Appropriate working capital policies are:
Cash Policies
• Do not invest funds in illiquid investment vehicles. Even if a long-term investment opportunity
offers the opportunity for outsized returns, do not make the investment unless you are sure there
are sufficient funds on hand to support all reasonable working capital needs during the period
when the funds will be tied up in the investment.
Accounts Receivable Policies
• Do not allow payment terms greater than __ days. Do not allow the sales staff to offer terms to
customers that exceed a specific number of days without prior approval by a senior manager.
• The maximum credit offered a customer is ___. Use a formula that best fits your industry to arrive
at a reasonable maximum amount of credit to offer customers, over which a senior manager must
approve the terms.
• Stop customer credit once days outstanding exceed __ days. This policy is designed to keep
additional credit from being extended to a customer who is not paying in a timely manner.
Inventory Policies
• Review inventory on hand exceeding __ days of usage. It is exceedingly difficult to adopt rules that
will minimize inventory, but consider this policy to bring excessive inventory levels to the attention
of management.
• Adopt just-in-time purchasing on qualified raw materials and merchandise. This policy is designed
to minimize on-hand inventories by making purchases as late as possible and having items
delivered in small quantities.
• Drop shipped inventory is the preferred stocking method. This policy shifts inventory ownership to
the company's suppliers, who ship directly to the company's customers on its behalf.
Accounts Payable Policies
• Do not pay accounts payable early. Adopt a monitoring system that highlights any payment made
earlier than the due date required by the supplier.
• Require purchase orders for amounts exceeding $___. This policy enforces an examination of larger
expenditures before they are actually made.
• Disallow purchases exceeding the department budget. If a manager commits to a specific
expenditure level for his department, then do not allow expenditures above that level without
approval by a senior manager.