How to build a working capital policy for your business

Most Indian SMEs manage working capital reactively — chasing payments when cash runs low, delaying supplier payments when stretched, and generally managing by feel. A working capital policy converts this into a system with defined targets, responsibilities, and escalation triggers.

A working capital policy defines four things: inventory targets (maximum days of inventory to hold, by category), receivables targets (target DDO by customer segment, with escalation triggers if exceeded), payables targets (target DPO — days payable outstanding — by supplier category), and minimum cash reserve (the floor below which you will not let your bank balance fall without triggering a specific action).

Set targets based on your business model, not generic benchmarks. A business with 30-day payment terms and 15-day production cycles has different working capital requirements than one with 90-day export receivables and 60-day raw material cycles. Your targets should be derived from your actual business model and the realistic improvement opportunity in your current performance.

Assign ownership. Your finance manager or CFO owns the working capital dashboard. They review it weekly and escalate to the founder when any metric breaches a defined threshold — receivables above X days, inventory above Y days, cash below Z lakhs.

Review quarterly and reset targets. As your business grows, your working capital dynamics change. A quarterly working capital review — 30 minutes in a management meeting — keeps the policy current and the team accountable.

Integrate with your banking. Share your working capital policy with your primary bank. A bank that understands your peak financing requirement, your seasonal cash cycle, and your receivables quality will be better positioned to offer you appropriate facilities before you need them urgently.