Working capital for a business is like gasoline for a car. Without gasoline, a car will not run, which is the same result for a business without working capital. Another description is working capital is the money, which helps a business function. Kulkarni (2011) describes working capital as, “The resources which are required for the process of production” (para. 2).
Businesses will put polices in place to manage the working capital. Kulkarni (2011), “The working capital is calculated as the difference between the current assets and the current liabilities. A well accepted norm is that the current assets need to be more than the current liabilities” (para. 4). Three policies include maturity matching, aggressive, and conservative approaches.
The maturity-matching approach occurs when current assets match current liabilities. For example, someone borrows $200 dollars to buy a lawn mower, and agrees to repay in two weeks assuming they will mow lawns to earn money. This is a medium risk approach because there is the possibility that the work does not align with the repayment needed for the $200. This approach takes the loan and re-invests, to make potentially more money, instead of holding the money to pay back the loan. The $200 has the potential to make more money – but not guaranteed. In the matching approach, Kulkarni (2011) “Keeping low levels of working capital means that you can employ your funds more productively elsewhere” (para, 7). With the aggressive approach, current assets are low, every time there is a sale, the money is invested immediately back into the business. This model
