is an absolute indicator that is used to determine the liquidity of an enterprise. Essentially, this indicator determines how much the company's current assets are greater than its short-term debts. IN foreign literature own working capital is also called working capital of the enterprise(working capital, net working capital).
What is own working capital (SOC). Economic sense
Let us analyze the general economic meaning of the indicator. The enterprise's own working capital shows the solvency/liquidity of the enterprise. The indicator is used to assess the company's ability to pay off debts using its current assets.
Own working capital. Synonyms
Synonyms for the indicator own working capital:
- own working capital,
- working capital of the enterprise,
- working capital,
- net working capital (NWC),
Own working capital. Balance calculation formula
Formula for calculating own working capital:
Own working capital = Current assets – Short-term liabilities
What are current assets?
Current assets of the enterprise- this is the sum of working capital (raw materials, supplies, components, fuel) and circulation funds (finished products, shipped but not paid for goods), expressed in money.
Formula for calculating SOS according to the Order of the Federal Office of Insolvency (Bankruptcy) dated August 12, 1994 No. 31-r On Methodological provisions for assessing the financial condition of an organization and establishing an unsatisfactory balance sheet structure is as follows:
Own working capital = line 490 – line 190
In the new balance (after 2011), the formula will be as follows:
SOS = p.1200 – p.1500
In addition to the first formula, there is another way to calculate this indicator. The second formula for calculating own working capital on the balance sheet.
Own working capital = (Equity capital + Long-term liabilities) – Non-current assets = p. 1300 + p.1530 – p.1100
In my opinion, the first formula is simpler to calculate and more convenient than the first. I recommend using it in your calculations.
In English literature, this indicator according to IFRS will be calculated as follows:
SOS(working capital) = Current Assets – Current Liabilities
CA – current assets,
CL – short-term accounts payable.
The company's balance sheet is taken from the company's official website. To understand the dynamics of changes in the solvency of an enterprise, we will take 1 year for analysis. The reporting period is a quarter. One quarter in 2013 and three in 2014.
Calculation of the indicator of own working capital for OJSC “Uralkali”
Own working capital 2013-4 = 87928663-47938587 = 39990076
Own working capital 2014-1 = 132591299-35610079 = 96981220
Own working capital 2014-2 = 115581096-34360221 = 81220875
Own working capital 2014-3 = 132981010-19458581 = 113522429
All SOS values are >0 and they also increase over time. This suggests that the solvency of OJSC Uralkali is growing.
Own working capital. Standard
Own working capital can be greater than zero, equal to or less than zero. As a rule, own working capital = 0 for new enterprises. If SOS >0, then this indicates that the financial condition (solvency) of the enterprise is normal, if<0, то предприятие финансово неблагополучно, т.к. у него не хватает денежных средств для покрытия долгов.
Summary
The article examined the indicator “own working capital”, which is one of the important indicators for assessing the solvency/liquidity of an enterprise. Do not confuse it with the working capital ratio, because these are completely different things. If own working capital is greater than zero, then this indicates the financial stability of the enterprise.
Working capital is the funds used by an enterprise to carry out its ongoing activities; current assets include the enterprise's inventories, work in progress, inventories of finished and shipped products, accounts receivable, as well as cash on hand and cash in the accounts of the enterprise.
Working capital is an indispensable condition for an enterprise to carry out business activities. In essence, working capital is money advanced into circulating production assets and circulation funds; it does not cost them money invested in it.
The essence of working capital is determined by their economic role, the need to ensure the reproduction process, including both the production process and the circulation process. Unlike fixed assets, which are repeatedly involved in the production process, working capital operates only in one production cycle and, regardless of the method of production consumption, completely transfers its value to the finished product.
Composition and classification of working capital
Working capital of an enterprise exists in the sphere of production and in the sphere of circulation. Working capital and circulation funds are divided into various elements that make up the material structure of working capital.
Elements of working capital
Working production assets include:
Productive reserves;
Work in progress and semi-finished products of own production;
Future expenses.
Industrial inventories are items of labor prepared for launch into the production process. In their composition, the following elements can be distinguished: raw materials, basic and auxiliary materials, fuel, purchased semi-finished products and components, containers and packaging materials, spare parts for routine repairs, low-value and wear-out items.
Work in progress and self-made semi-finished products are objects of labor that have entered the production process: materials, parts, assemblies and products that are in the process of processing or assembly, as well as self-made semi-finished products that are not fully completed by production in some workshops and are subject to further processing in other workshops the same enterprise.
Deferred expenses are intangible elements of working capital, including costs for the preparation and development of new products, which are produced in a given period (quarter, year), but are attributed to the products of a future period.
Circulation funds consist of the following elements:
Finished products in warehouses;
Goods in transit (shipped products);
Cash;
Funds in settlements with consumers of products.
The relationship between individual elements of working capital or their components is called the structure of working capital. Thus, in the reproductive structure the ratio of circulating production assets and circulation funds is on average 4:1. In the structure of industrial inventories on average in industry, the main place (about 1/4) is occupied by raw materials and basic materials, significantly lower (about 3%) by the share of spare parts and containers. Industrial inventories themselves have a higher share in fuel- and material-intensive industries. The structure of working capital depends on the industry of the enterprise, the nature and characteristics of the organization of production activities, supply and sales conditions, settlements with consumers and suppliers.
Standardized and non-standardized working capital
These elements of working capital are grouped in different ways. Usually there are two groups that differ in the degree of planning: standardized and non-standardized working capital. Rationing is the establishment of economically justified (planned) stock standards and standards for elements of working capital necessary for the normal operation of the enterprise. Standardized working capital usually includes working capital and finished products. Circulation funds are usually not standardized.
Sources of working capital formation
Among the sources used for the formation of working capital, there are own, borrowed and attracted funds.
The total amount of its own working capital is established by the enterprise independently. Usually it is determined by the minimum need for funds to form the necessary inventories, to ensure planned volumes of production and sales of products, as well as to make payments on time.
In the process of financial planning, an enterprise takes into account the increase and decrease in the standards of its own working capital, defined as the difference between the standards at the end and beginning of the planning period. The increase in the standard of own working capital is financed primarily from own resources.
Along with profit, so-called sustainable liabilities, which are equivalent to own funds, are used to replenish own working capital. Stable liabilities are those that are constantly used by the enterprise in circulation, although they do not belong to it (for example, the reserve for upcoming payments of the minimum debt to workers and employees for wages, social insurance contributions, etc.), etc.
The stable liabilities include normal, month-to-month arrears of wages and social insurance contributions, the balance of the repair (reserve) fund, consumer funds for deposits for returnable packaging, and the reserve for future payments. Since these funds are constantly in circulation, enterprises and their size fluctuate significantly throughout the year, their minimum amount in a given year is used as a source for the formation of equivalent working capital.
During the year, the need of enterprises for working capital may change, so it is not advisable to fully generate working capital from their own sources. “This would lead to the formation of excess working capital at certain moments and weakening incentives for their economical use. The enterprise therefore uses borrowed funds to finance working capital.
Additional need for working capital due to temporary needs is provided by short-term bank loans.
In addition to own and borrowed funds, the company's turnover includes borrowed funds. These are accounts payable of all types, as well as funds for targeted financing before they are used for their intended purpose.
Determining the enterprise's need for working capital
Determining the enterprise's need for its own working capital is carried out in the process of rationing, i.e. determining the working capital standard.
The purpose of rationing is to determine the rational amount of working capital diverted for a certain period of time into the sphere of production and the sphere of circulation.
Standardization procedure
The need for working capital is determined by the enterprise when drawing up a financial plan.
The value of the standard is not constant. The size of own working capital depends on the volume of production, supply and sales conditions, the range of products produced, and the forms of payment used.
When calculating the enterprise's need for its own working capital, the following must be taken into account. Own working capital must cover the needs of not only the main production to fulfill the production program, but also the needs of auxiliary and auxiliary production, housing and communal services and other farms that are not related to the main activities of the enterprise and are not on an independent balance sheet, as well as for major repairs, carried out on its own. In practice, however, the need for own working capital is often taken into account only for the main activities of the enterprise, thereby underestimating this need.
Rationing of working capital is carried out in monetary terms. The basis for determining the need for them is the cost estimate for the production of products (works, services) for the planned period. At the same time, for enterprises with a non-seasonal nature of production, it is advisable to take the data of the fourth quarter as the basis for calculations, in which the production volume is, as a rule, the largest in the annual program. For enterprises with a seasonal nature of production, data from the quarter with the lowest production volume, since the seasonal need for additional working capital is provided by short-term bank loans.
To determine the standard, the average daily consumption of standardized elements in monetary terms is taken into account. For production inventories, the average daily consumption is calculated according to the corresponding item of production costs; for work in progress - based on the cost of gross or commercial output; for finished products - based on the production cost of marketable products.
In the process of standardization, private and aggregate standards are established. The standardization process consists of several successive stages. First, stock standards are developed for each element of standardized working capital. The norm is a relative value corresponding to the volume of stock of each element of working capital. As a rule, standards are established in days of supply and mean the duration of the period provided by this type of material assets. For example, the stock norm is 24 days. Therefore, there should be only enough inventory to support production within 24 days.
The stock rate can be set as a percentage or in monetary terms to a certain base.
Next, based on the stock norm and consumption of a given type of inventory, the amount of working capital necessary to create normalized reserves for each type of working capital is determined. This is how private standards are determined.
Private standards include standards for working capital in inventories; raw materials, basic and auxiliary materials, purchased semi-finished products, components, fuel, containers, low-value and wear-and-tear items (IBP); in work in progress and semi-finished products of own production; in deferred expenses; finished products.
Standardization methods
The following main methods of rationing working capital are used: direct counting, analytical, coefficient.
The direct counting method provides for a reasonable calculation of inventories for each element of working capital, taking into account all changes in the level of organizational and technical development of the enterprise, transportation of inventory, and settlement practices between enterprises. This method, being very labor-intensive, requires highly qualified economists and the involvement of employees of many enterprise services (supply, legal, product sales, production department, accounting) in standardization. But this allows you to most accurately calculate the company’s need for working capital.
The analytical method is used in the case when in the planning period there are no significant changes in the operating conditions of the enterprise compared to the previous one. In this case, the calculation of the standard working capital is carried out on an aggregate basis, taking into account the relationship between the growth rate of production volume and the size of the normalized working capital in the previous period. When analyzing available working capital, their actual inventories are adjusted and excess ones are eliminated.
With the coefficient method, a new standard is determined on the basis of the standard of the previous period by introducing changes into it, taking into account the conditions of production, supply, sales of products (works, services), and calculations.
Analytical and coefficient methods are applicable to those enterprises that have been operating for more than a year, have mainly formed a production program and organized the production process, and do not have a sufficient number of qualified economists for more detailed work in the field of working capital planning.
In practice, the most common method is direct counting. The advantage of this method is its reliability, which makes it possible to make the most accurate calculations of partial and aggregate standards.
The characteristics of various elements of working capital determine the specifics of their rationing. Let's consider the main methods of rationing the most important elements of working capital: materials (raw materials, basic materials and semi-finished products), work in progress and finished products.
Rationing of materials
The working capital standard for stocks of raw materials, basic materials and purchased semi-finished products is calculated on the basis of their average daily consumption (P) and the average stock rate in days.
One-day consumption is determined by dividing the cost of a certain element of working capital by 90 days (with a uniform nature of production - by 360 days).
The average rate of working capital is defined as a weighted average based on the rate of working capital for individual types or groups of raw materials, basic materials and purchased semi-finished products and their daily consumption.
The rate of working capital for each type or homogeneous group of materials takes into account the time spent in current (T), insurance (C), transport (M), technological (A) and preparatory (D) stocks.
Current stock is the main type of stock required for the smooth operation of an enterprise between two next deliveries. The size of the current stock is influenced by the frequency of supplies of materials under contracts and the volume of their consumption in production. The working capital rate in the current inventory is usually assumed to be 50% of the average supply cycle, which is due to the supply of materials from several suppliers and at different times.
Safety stock is the second largest type of stock, which is created in case of unforeseen deviations in supply and ensures the continuous operation of the enterprise. Safety stock is generally assumed to be 50% of the current stock, but may be less than this amount depending on the location of suppliers and the likelihood of supply disruptions.
Transport stock is created in case of exceeding the terms of cargo turnover in comparison with the terms of document flow at enterprises located significant distances from suppliers.
Technological stock is created in cases where a given type of raw material requires pre-processing and aging to impart certain consumer properties. This stock is taken into account if it is not part of the production process. For example, when preparing for the production of certain types of raw materials and materials, time is required for drying, heating, grinding, etc.
Preparatory stock is associated with the need to receive, unload, sort and store production stocks. The time standards required for these operations are established for each operation for the average size of delivery based on technological calculations or through timing.
The working capital standard in inventories of raw materials, basic materials and purchased semi-finished products (N), reflecting the total need for working capital for this element of production inventories, is calculated as the sum of working capital standards in current, insurance, transport, technological and preparatory stocks. The resulting general norm is multiplied by the daily consumption for each type or group of materials:
H= P (T+ C+ M+ A+D).
In production inventories, working capital in stocks of auxiliary materials, fuel, containers, low-value and wearable items, etc. is also standardized.
Rationing of work in progress
The value of the working capital standard in work in progress depends on four factors: the volume and composition of products produced, the duration of the production cycle, the cost of production and the nature of the increase in costs during the production process.
The volume of production directly affects the amount of work in progress: the more products are produced, all other things being equal, the larger the size of work in progress will be. Changes in the composition of manufactured products have different effects on the amount of work in progress. With an increase in the share of products with a shorter production cycle, the volume of work in progress will decrease, and vice versa.
The cost of production directly affects the size of work in progress. The lower the production costs, the lower the volume of work in progress in monetary terms. An increase in production costs entails an increase in work in progress.
The volume of work in progress is directly proportional to the duration of the production cycle. The production cycle includes the time of the production process, technological stock, transport stock, the time of accumulation of semi-finished products before the start of the next operation (working stock), the time that semi-finished products are in stock to guarantee the continuity of the production process (safety stock). The duration of the production cycle is equal to the time from the moment of the first technological operation before acceptance of the finished product at the finished product warehouse. Reducing inventories in work in progress improves the use of working capital by reducing the duration of the production cycle.
To determine the rate of working capital for work in progress, it is necessary to know the degree of readiness of products. It is reflected by the so-called cost increase coefficient.
All costs in the production process are divided into one-time and accruing. Non-recurring costs include those incurred at the very beginning of the production cycle - the costs of raw materials, supplies, purchased semi-finished products. The remaining costs are considered accrual. The increase in costs during the production process can occur evenly and unevenly.
Rationing of finished products
The working capital standard for finished products is defined as the product of the working capital standard and the one-day production of marketable products in the coming year at production cost:
where N is the working capital standard for finished products; B - production of commercial products in the fourth quarter of the coming year (with a uniform nature of production) at production cost; D - number in the period; T - working capital norm for finished products, days.
The stock rate (T) is set depending on the time required;
To select individual types of products and assemble them into batches;
For packaging and transportation of products from the suppliers’ warehouse to the sender’s station;
For loading.
The total standard of working capital at an enterprise is equal to the sum of the standards for all their elements and determines the total need of an economic entity for working capital. The general norm of working capital is established by dividing the total norm of working capital by the one-day output of marketable products at production cost in the fourth quarter, according to which the norm was calculated.
Non-standardized working capital of the sphere of circulation includes funds in goods shipped, cash, funds in accounts receivable and other payments. Business entities have the opportunity to manage these funds and influence their value using a system of lending and settlements.
Analysis of the use of working capital of the enterprise
The financial position of an enterprise is directly dependent on the state of working capital, therefore enterprises are interested in organizing the most rational movement and use of working capital.
Indicators of efficiency of use of working capital
The efficiency of using working capital is characterized by a system of economic indicators, primarily the turnover of working capital.
Working capital turnover refers to the duration of the complete circulation of funds from the moment of acquisition of working capital (purchase of raw materials, supplies, etc.) to the release and sale of finished products. The circulation of working capital is completed by crediting the proceeds to the company's account.
The turnover of working capital is not the same at different enterprises, which depends on their industry, and within one industry - on the organization of production and sales of products, the placement of working capital and other factors.
Working capital turnover is characterized by a number of interrelated indicators: the duration of one turnover in days, the number of turnovers for a certain period (turnover ratio), the amount of working capital employed at the enterprise per unit of production (load factor).
The duration of one turnover of working capital is calculated by the formula:
where O is the duration of the turnover, days; C-balances of working capital (average or as of a specific date), rub.; T - volume of commercial products, rub.; D is the number of days in the period under review, days.
A decrease in the duration of one revolution indicates an improvement in the use of working capital.
The number of turnovers for a certain period, or the working capital turnover ratio (CR), is calculated using the formula:
The higher the turnover ratio under given conditions, the better the use of working capital.
The load factor of funds in circulation (Kz), the inverse of the turnover ratio, is determined by the formula:
In addition to these indicators, the return on working capital indicator can also be used, which is determined by the ratio of profit from sales of the enterprise's products to the balance of working capital.
Working capital turnover indicators can be calculated for all working capital involved in turnover and for individual elements.
Changes in the turnover of funds are identified by comparing actual indicators with planned or indicators of the previous period. As a result of comparison of working capital turnover indicators, its acceleration or deceleration is revealed.
When the turnover of working capital accelerates, material resources and sources of their formation are released from circulation; when it slows down, additional funds are drawn into circulation.
The release of working capital due to the acceleration of their turnover can be absolute and relative. An absolute release occurs if the actual balances of working capital are less than the standard or balances of the previous period while maintaining or exceeding the sales volume for the period under review. Relative release of working capital occurs in cases where the acceleration of their turnover occurs simultaneously with an increase in production volume, and the growth rate of production volume is faster than the growth rate of working capital balances.
Increasing the efficiency of working capital
The efficiency of using working capital depends on many factors. Among them, we can distinguish external factors that influence regardless of the interests and activities of the enterprise, and internal ones, which the enterprise can and should actively influence.
External factors include: the general economic situation, features of tax legislation, conditions for obtaining loans and interest rates on them, the possibility of targeted financing, participation in programs financed from the budget. Taking these and other factors into account, an enterprise can use internal reserves to rationalize the movement of working capital.
Increasing the efficiency of using working capital is ensured by accelerating their turnover at all stages of the circulation.
Significant reserves for increasing the efficiency of using working capital are built directly into the enterprise itself. In the production sector, this applies primarily to inventories. Inventories play an important role in ensuring the continuity of the production process, but at the same time they represent that part of the means of production that is temporarily not involved in the production process. Effective organization of inventory is an important condition for increasing the efficiency of using working capital. The main ways to reduce inventories come down to their rational use; liquidation of excess stocks of materials; improving standardization; improving the organization of supply, including by establishing clear contractual terms of supply and ensuring their implementation, optimal selection of suppliers, and smooth operation of transport. An important role belongs to improving the organization of warehouse management.
Reducing the time spent by working capital in work in progress is achieved by improving the organization of production, improving the equipment and technology used, improving the use of fixed assets, especially their active part, and saving at all stages of the movement of working capital.
In the sphere of circulation, working capital does not participate in the creation of a new product, but only ensures its delivery to the consumer. Excessive diversion of funds into circulation is a negative phenomenon. The most important prerequisites for reducing investments of working capital in the circulation sector are the rational organization of sales of finished products, the use of progressive forms of payment, timely execution of documentation and acceleration of its movement, compliance with contractual and payment discipline.
Accelerating the turnover of working capital allows you to free up significant amounts and thus increase production volume without additional financial resources, and use the released funds in accordance with the needs of the enterprise.
Conclusion
1. Working capital of an enterprise is a set of circulating production assets and circulation funds. Working production assets include: raw materials, main and auxiliary materials, unfinished products, fuel and other items of labor that are entirely consumed in each production cycle and the cost of which is transferred to the manufactured product immediately in full.
The circulation funds include: finished products in the warehouse, shipped products, cash in settlements.
2. According to the sources of formation, working capital is divided into own (funds constantly at the disposal of the enterprise and formed from its own resources) and borrowed (bank loans, accounts payable and other liabilities).
3. According to the scope of rationing, working capital is divided into regulated (by which stock standards are established: circulating production assets and finished products in the warehouse) and non-standardized. Rationing of working capital is the process of developing economically justified amounts of working capital necessary for organizing the normal operation of the enterprise. It is a necessary prerequisite for the effective use of working capital. Typically, an enterprise determines working capital standards for materials, inventories in the production process, and inventories of finished products.
4. Increasing the efficiency of using working capital is achieved by accelerating their turnover.
From sales of products to the average cost of working capital. The duration of one turnover in days is equal to the quotient of the number of days for the analyzed period (30, 90, 360) divided by the turnover of working capital. The reciprocal of the turnover rate shows the amount of working capital advanced per 1 ruble. revenue from product sales. This ratio characterizes the degree of utilization of funds in circulation and is called the working capital utilization ratio. The lower the working capital load factor, the more efficiently working capital is used.
The main goal of managing enterprise assets, including working capital, is to maximize profit on invested capital while ensuring stable and sufficient solvency of the enterprise. To ensure sustainable solvency, the enterprise must always have a certain amount of money in its account, which is actually withdrawn from circulation for current payments. Part of the funds should be placed in the form of highly liquid assets. An important task in terms of managing working capital of an enterprise is to ensure an optimal balance between solvency and by maintaining the appropriate size and structure. It is also necessary to maintain an optimal ratio of own and borrowed working capital, since the financial stability and independence of the enterprise and the possibility of obtaining new loans directly depend on this.
Working capital turnover
The criterion for the effectiveness of working capital management is the time factor. The longer working capital remains in the same form (cash or commodity), the lower, other things being equal, the efficiency of their use, and vice versa. The turnover of working capital characterizes the intensity of their use.The role of the turnover indicator is especially great for industries in the sphere of circulation, including trade, public catering, consumer services, intermediary activities, banking business, etc.
The efficiency of using working capital of industrial enterprises is characterized by three main indicators:
Turnover ratio;
Working capital utilization ratio;
Duration of one revolution.
The turnover ratio is determined by dividing the volume of product sales at wholesale prices by the average balance of working capital at the enterprise:
Ko = Рп/СО, where
Ko – working capital turnover ratio, turnover;
Рп – volume of products sold, rub.;
SO – average balance of working capital, rub.
The turnover ratio characterizes the number of turnovers made by the enterprise's working capital for a certain period (year, quarter), or shows the volume of products sold per 1 ruble. working capital.
Comparison of turnover ratios over the years allows us to identify trends in the efficiency of using working capital. If the number of turnovers made by working capital increases or remains stable, then the enterprise operates rhythmically and uses monetary resources rationally. A decrease in the number of turnovers made in the period under review indicates a drop in the rate of development of the enterprise and an unfavorable financial condition.
In our case
Ko = 2400000 / 240000 = 10 (revolutions).
The working capital utilization ratio is the inverse of the turnover ratio. It characterizes the amount of working capital spent per 1 ruble. products sold:
Kz = CO / Rp, where
Кз – working capital load factor.
In this case
Kz = 240000 / 2400000 = 0.1
The duration of one turnover in days is found by dividing the number of days in the period by the turnover ratio Co:
T = D / Ko, where
D – number of days in the period (360, 90).
In this case
T = 360 / 10 = 36 (days)
That. During the year, the working capital of the enterprise makes 10 revolutions, the duration of one revolution is 36 days.
Working capital efficiency
Enterprise management is a continuous process, carried out through the implementation of management functions. It includes planning, organization, coordination, motivation and control. These functions, that is, a specific type of management activity, consistently consist of collecting, systematizing, transmitting, storing information, developing and making decisions, as well as putting into action and monitoring the execution of decisions.Working capital management is an integral part of the enterprise management system. Within its framework, issues related to determining the size and optimal structure of current assets, sources of their formation, organization of current and future management, etc. are resolved.
In the working capital management system, there are control and managed subsystems, which are respectively represented by subjects and objects of management. The objects of management should include directly assets, which include advances of working capital, elements of working capital, sources of its formation, as well as the whole variety of economic relations that arise in the process of circulation of working capital. In the management subsystem, it is necessary to highlight the corresponding management subjects - services and management bodies that use specific methods of targeted influence on working capital.
Planning occupies an important place in the working capital management system. During planning, an enterprise, based on an analysis of external and internal information, assesses the state of current assets, their structure and size, and determines the directions for the most effective use. The function of an organization in managing working capital is to create conditions for its effective functioning. This is ensured:
Development of methods, norms and standards;
- formation of a management structure;
- establishing relationships between management departments.
Coordination in the management process ensures its continuity, coherence and compliance with the specified parameters. The purpose of coordination is to achieve consistency in the actions of all parts of the management system.
Motivation as a management function is expressed in the economic and moral stimulation of the enterprise's employees, since it is necessary to increase the interest of members of the workforce in the effective use of production reserves, accelerating the turnover of funds in the spheres of production and circulation, and rationally attracting various sources of working capital.
Control as a management function is designed to ensure a correct assessment of the situation through quantitative and qualitative assessment of the results of the functioning of the enterprise, its management and managed systems. In the general management system, control acts as an element of feedback. Without this, all other management functions cannot be fully realized.
The main goal of managing an enterprise's working capital is to maximize profit on invested capital (profitability) while ensuring sustainable and sufficient solvency of the enterprise, which are opposed to each other. And to ensure sustainable solvency, the enterprise must have a certain amount of money in its account, which is actually withdrawn from circulation and necessary for current payments. Part of the funds should be placed in the form of highly liquid assets. Thus, an important task in terms of managing working capital of an enterprise is to ensure an optimal balance between solvency and profitability by maintaining the appropriate size and structure of working capital. It is also necessary to maintain an optimal ratio of own and borrowed sources of working capital, since the financial stability and independence of the enterprise directly depend on this. A thoughtful approach to large purchases of raw materials, materials and components for future use is necessary. The benefit from such purchases can be purely illusory, since they lead to an understatement of costs with all the ensuing tax consequences and a slowdown in the turnover of working capital, which has a negative impact on financial stability.
When managing working capital, it is customary to control:
The volume and structure of working capital, their dynamics by type, as well as in comparison with sales revenue;
compliance of normalized working capital with standards, size and reasons for deviations;
changes in the composition and value of regulated and non-standardized working capital, their causes and consequences;
indicators of the use of working capital over time.
An analysis of the volume and structure of working capital, dividing them into standardized and non-standardized, is carried out based on data in comparison with the beginning of the reporting period. In the process of analysis, it is advisable to study the change in rationed funds during the reporting period, both as a whole and for individual elements: stocks of raw materials and materials in the warehouse, stocks in the warehouse, in transit, cash and securities in the cash register, goods shipped on and on orders, services provided. Then you need to analyze non-standardized working capital: cash, accounts receivable, and other funds. Particular attention should be paid to changes in the absolute amount and specific value of funds invested in goods shipped and accepted for safekeeping, including under commission and commission agreements, as well as accounts receivable.
For agricultural enterprises, the duration of the operating cycle is of particular importance, which is associated with the temporary immobilization of current assets. It is necessary to monitor whether the profitability of manufactured products covers the costs associated with immobilization and maintenance of the production process, or whether these costs are compensated by the profitability of services provided and work performed. That is, it is necessary to control the exit of production costs from the break-even framework of the financial activities of the enterprise as a whole. As a result of the analysis, shortcomings in the placement and use of economic assets are identified, and measures to eliminate them are outlined. It is noteworthy that the growth rate of normalized working capital may be higher than the growth rate of sales revenue as a result of an accelerated increase in cash and other assets. At the same time, the growth of funds invested in finished products may correspond to or be lower than the growth rate of sales revenue. In this case, it is necessary to determine the feasibility of the existing ratio in the use of household resources. Based on the results of financial activities, it is useful to study the trend of releasing or attracting additional working capital. To determine savings in working capital due to the acceleration of their turnover, the need for current assets for the reporting period is established based on actual revenue and turnover rate for the previous period. By increasing working capital through borrowed funds, the company needs to monitor the growth rate of current assets and, in addition, it is very important to plan the receipt of funds into the current account before repaying the loan. This problem is especially relevant when accounts payable need to be returned without waiting for the completion of the operating cycle for the current project.
From an economic point of view, the turnover ratios of inventories, accounts receivable, cash, and securities are quite important. They serve as initial data for calculating the efficiency of using working capital of an agricultural enterprise. Accelerating asset turnover leads to the release, i.e. to savings, reduction in specific terms of fixed costs, increase.
Working capital analysis
Working capital analysis allows you to:Assess the efficiency of resource use in the operational activities of the enterprise;
determine the liquidity of the enterprise’s balance sheet, i.e. the ability to repay short-term obligations in a timely manner;
find out what the enterprise’s own working capital is invested in during the financial cycle.
The size and structure of current assets must correspond to the needs of the enterprise, which are reflected in the budget. Current assets should be minimal, but sufficient for the successful and uninterrupted operation of the enterprise.
The structure of working capital is the proportion of distribution of resources between individual elements of current assets. It reflects, in particular, the specifics of the operating cycle, as well as what part of current assets is financed from own funds and long-term loans, and what part is financed from borrowed funds, including short-term bank loans.
The size and structure of own working capital may reflect the duration and characteristics of the financial cycle.
The value of own working capital shows not only how much current assets exceed current liabilities, but also how much non-current assets are financed from the enterprise’s own funds and long-term loans.
The composition and structure of working capital varies in different sectors and sub-sectors of the economy. They are determined by many factors of production, economic and organizational nature. Thus, in mechanical engineering, where the production cycle is long, the proportion of work in progress is high. In light and food industry enterprises, the main place is occupied by raw materials (for example, in the textile industry). At the same time, the food industry has relatively high stocks of auxiliary materials, containers, and finished products.
In enterprises where a large number of tools, fixtures, and devices are used, the proportion of low-value and wearable items is high (in mechanical engineering and metalworking).
In the extractive industries there are practically no reserves of raw materials and basic materials, but the share of future expenses is high. In addition, for example, in the oil industry, an increased share is made up of auxiliary materials and spare parts for repairs.
The amount of finished products, goods shipped, and accounts receivable are influenced by such factors as the conditions for selling products, the forms and state of payments.
The effectiveness and economic feasibility of the operation of an enterprise is assessed not only by absolute, but also by relative indicators. The main relative indicators are the system of profitability indicators.
In the broadest sense of the word, the concept of profitability means profitability, profitability. An enterprise is considered profitable if its results from the sale of products (works, services) cover (circulation) and, in addition, form an amount of profit sufficient for the normal functioning of the enterprise.
The economic essence of profitability can be revealed only through the characteristics of the system of indicators. Their general meaning is to determine the amount of profit from 1 ruble. invested capital, and since these are relative indicators, they are practically not affected by inflation.
Let's look at the main profitability indicators.
Return on assets (property) Ra shows how much profit the enterprise receives from each ruble invested in assets:
Ra = Pch / A,
Where Pch is the profit remaining at the disposal of the enterprise (); A is the average value of assets (balance sheet currency).
Return on current assets Rt.a shows how much profit the enterprise receives from 1 ruble invested in current assets:
Rt.a = Pch / At,
Where At is the average value of current assets.
This indicator allows us to give a comprehensive assessment of the efficiency of using working capital and can be presented as the product of two other indicators - return on sales Ppr and return on assets Ra:
Rt.a = Rpr x Ra.
The optimal level of working capital will maximize profits with an acceptable level of liquidity and commercial risk.
Return on investment Ree reflects the efficiency of use of funds invested in the enterprise. In developed countries, this indicator expresses an assessment of the “skill” of investment management:
Ri = P / (SC + DO),
Where P is the total amount of profit for the period; SK – average equity capital; DO – average value of long-term liabilities.
RGC's return on equity reflects the share of profit in equity:
RSK = Pch / SK,
The profitability of the main activity of Rd shows what is the share of profit from the sale of products (works, services) of the main type of activity in the amount of production costs:
Rd = Pr / Z,
Where Pr – profit from sales; Z – for production of products.
The profitability of products sold Рп shows the profit per 1 ruble. products sold:
Рп = Пч / Вр,
Where Вр – revenue from sales of products (works, services).
This indicator indicates the efficiency of not only the economic activities of the enterprise, but also its processes.
A modified indicator of product profitability is profitability:
Ro.pr = Pr / Vpr,
Where Pr – profit from sales of products: Vpr – sales volume.
To assess accounts receivable turnover, the indicators given below are used.
Accounts receivable turnover ratio
KDZ = Vr / Zav.d,
Where Vр – sales volume; Zav.d - average amount of accounts receivable.
This ratio shows the expansion or reduction of commercial credit provided by the enterprise. If, when calculating the coefficient, sales revenue is calculated based on the transfer of the right to cost, then an increase in the coefficient means a reduction in sales on credit, and its decrease indicates an increase in the volume of credit provided.
Receivables repayment period
Tpog = 360 / KDZ.
The longer the repayment period, the higher the risk of non-repayment. This indicator should be considered by legal entities and individuals, types of products, payment terms, i.e. terms of transactions.
Turnover ratio
Kob MPZ = D / Zav MPZ,
Where D is the cost; Zav MPZ is the average value of inventories.
Inventory turnover period
Tob MPZ = 360 / Kob MPZ.
This indicator indicates the rational, efficient or, conversely, ineffective use of working capital, based on the dynamics of the coefficient over a number of years.
Provision of working capital
The structure of working capital shows the share of its components in value terms and as a percentage of the total. The study of the structure and its dynamics is of great importance, since it becomes possible to identify the most important inventories of material assets for the production process and determine ways to improve the use of working capital. Thus, a significant increase in finished goods inventories or accounts receivable indicates serious problems with sales. The low share of raw materials entails a stop in production due to the lack of a subject of labor. Undesirable dynamics of changes in the share of working capital is the cause of non-payments for current operations: payments, taxes, payment of supplier bills.The structure of working capital varies significantly across sectors of material production:
At thermal power plants, the largest share is occupied by fuel reserves or consumer receivables;
in the mining industry - finished product inventories;
in shipbuilding - work in progress;
in construction – unfinished construction;
in livestock farming – young animals for fattening.
Sources of financing for working capital are own or borrowed funds. That part of the cost of working capital, which is acquired at the expense of own funds, is called net current assets.
Borrowed funds used to finance the acquisition of working capital are bank loans or short-term debt to third parties, the so-called current liabilities.
The optimal thing for a business entity is the equality of accounts receivable and accounts payable.
Accounts receivable is a highly variable and dynamic element of working capital, significantly depending on the company's policy regarding consumers of products and services. Since accounts receivable represents the immobilization of its own working capital, that is, in principle, it is not beneficial to the company, the conclusion clearly suggests itself about its maximum possible reduction. Theoretically, accounts receivable can be reduced to a minimum, however, this does not happen for many reasons, including the reason.
From the point of view of reimbursement of the cost of supplied products and services, the sale can be carried out using one of three methods:
Prepayment;
cash payment;
payment with deferred payment, usually carried out in the form of non-cash payments, the main forms of which are collection payments and settlement checks.
The last scheme is the most disadvantageous for the seller, since he has to credit the buyer, but it is the main one in the system of payments for delivered products and services. When paying with deferred payment, receivables for commodity transactions arise as a natural element of such a generally accepted payment system.
An excess of accounts receivable indicates an additional need for borrowed funds to increase working capital. Excess accounts payable is part of stable liabilities that do not belong to an economic entity, but are constantly in economic circulation. Accounts payable arise as a result of current operations and the accepted system of settlements with various counterparties and other third parties and entities.
Behind the long-term sources are investors and lenders, behind the short-term sources are creditors. The provision of funds by these working capital providers is subject to different conditions and taking into account various factors:
The opportunity received in return to manage the recipient’s activities;
control over the direction and expediency of using the provided resources;
level of current remuneration;
priority of participation in the distribution of assets in the event of liquidation of the enterprise, etc.
Having provided the company with their own working capital for temporary use, their owners naturally expect to receive some compensation in return: interest, expansion of the market for their own products, stability of supply, etc. If for suppliers of working capital the regular remuneration they receive is income, then for the recipient enterprise, considered as an independent economic entity, the remuneration paid to them is an expense, an expense.
For major sources of financing, you can quantify how much a given source costs the company. The total amount of funds that must be paid for the use of a certain volume of attracted working capital, expressed as a percentage of this volume, is called the cost of the source. It should be noted that in a market economy there are practically no free sources of financing. In addition, sources differ in their cost, and the cost of a particular source may change (usually upward) when the financial structure of the enterprise changes.
In the strategic plan, long-term sources are of particular importance, and therefore, the funds generated by them have their own name among accountants and financiers - capital. It is according to individual sources and in general that it is the object of close attention of all persons interested in or related to the activities of the enterprise. As a generalizing characteristic of the cost of capital for the enterprise as a whole, the weighted average cost of capital indicator is used, calculated using the weighted arithmetic average (WACC) formula:
N
WASS = ? kj*dj,
j=1
Where kj is the cost of the jth source of funds;
dj – the share of the j-th source of funds in their total amount.
The WACC indicator has a fairly simple interpretation - it characterizes the level of expenses as a percentage that an enterprise must bear annually for the opportunity to carry out its activities by attracting financial resources on a long-term basis. Relatively speaking, WACC is numerically equal to the percentage received on average by capital providers, that is, strategic investors.
The WACC indicator is one of the key characteristics of the economic potential of an enterprise and is significant for all persons without exception who have an interest in its activities. A decrease in this indicator in dynamics for a particular enterprise is most often considered as a positive trend.
The above considerations show that the problem of controlling the structure of sources of financing working capital in general and long-term sources (capital) in particular is always relevant. This problem is solved by maintaining the so-called target capital structure, the meaning of which is that as the enterprise’s activities stabilize, it develops a certain ratio between its own and , reflecting a certain acceptable degree of financial risk and reserve borrowing potential, which is understood as the ability of the enterprise in the event of the need to attract borrowed capital in the desired volumes and on acceptable terms.
In a simplified way, the target capital structure can be understood as a consciously maintained ratio between own and borrowed working capital. A high share of borrowed funds means a low level of reserve borrowing capacity. Both of these concepts are not only strategically important, but are also directly related to the financing of current economic activities, since the conditions for obtaining a short-term loan in the vast majority of cases also depend on the financial structure of the enterprise. At the same time, it can be argued that optimizing the structure of working capital is the core of a more general task - optimizing the structure of sources.
One of the most important characteristics of the financial condition of an enterprise is the stability of its activities from a long-term perspective. The activities of an economic entity can be characterized from various aspects, but in the most general case it can be represented as a set of alternating inflows and outflows of funds. Part refers to the characteristics of the enterprise’s activities from a short-term perspective, the other part characterizes this activity from a long-term perspective. The latter is associated primarily with the general financial structure of the enterprise, the degree of its dependence on creditors and investors.
The possibility of varying the methods of raising funds is determined by the following features of the market relations system.
Firstly, resources (material, financial, intellectual, information, etc.) are distributed unevenly among the owners.
Secondly, there are always an abundance of individuals and legal entities who either know (from their subjective point of view) how and where resources of a certain volume and composition can be profitably offered, but do not possess them, or, conversely, have in their have temporarily free resources at their disposal, but do not know a clear way to use them.
Thirdly, the system for regulating the process of redistribution of resources has two sides: normative (various aspects of doing business are regulated by law, for example, the sequence of satisfying the claims of creditors) and incentive (providing a resource for temporary use is encouraged by establishing some kind of remuneration: wages, rent, interest, dividends, etc., and the amount of incentives is determined by many factors, including the risk factor of losing the provided resource).
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Working capital of an enterprise forms the basis for the functioning of the organization. Therefore, when analyzing the performance of a company, assessing the size of this indicator is considered very important.
Definition
The working capital of an enterprise is also called working capital; they represent property that takes part in one production cycle, which is usually less than one year. Their size has a direct impact on the cost of production. It is necessary to ensure their constant replenishment, but there should not be an excess of them.
Working capital serves not only production processes, but also circulation (sales). Circulation funds include finished products and cash.
The main function of working capital is to ensure an uninterrupted production process.
Classification
The composition of an enterprise's working capital includes many components. They can be divided into several groups:
- Inventory held in warehouse. These include raw materials, components, spare parts, semi-finished products, containers, and fuel.
- Products that are already in the production process. This category includes unfinished construction and production. As well as future expenses for advance payments.
- Finished products in stock and already shipped.
- Available financial resources in the company's cash register and current accounts, short-term financial investments and accounts receivable.
The structure of an enterprise's working capital is not universal and depends on a large number of factors. For example, from the industry and technological organization of production. Contractual relations with suppliers and buyers, which determine the volumes and schedule of shipments and payments, are of considerable importance.
Where does the company get its funds from?
Sources of working capital of an enterprise can be either its own, borrowed or attracted. Each company determines for itself what total amount of working capital it needs to optimize the production process. That is why their quantity is calculated based on the minimum required level of funds, which will allow the production and shipment of the planned volume of products, and the creation of the necessary warehouse stock without shortages and overstocking. But you also need to ensure that their volume is sufficient to repay all obligations with counterparties, company employees, government and tax authorities.
Own working capital is usually replenished from profits. But this is not the only source; some liability items can also be equated to working capital. For example, wage arrears that carry over from one month to another, as well as the accompanying mandatory contributions to the social insurance fund. In addition, reserves for future payments and a positive balance in the repair fund may serve as sources. In certain areas of business, such items include the buyer's deposit for returnable packaging. Since figures can vary throughout the year, and sometimes quite significantly, the lowest figures are taken as the basis for financial planning.
It is quite difficult to make accurate forecast calculations, because situations arise that require urgent adjustments. Therefore, it is often quite difficult to satisfy an enterprise’s need for working capital only at the expense of its own finances. Creating additional reserves is strategically incorrect - this will lead to a slowdown in the company's development rate. Based on expediency, the enterprise’s need for additional working capital should be covered with funds raised from outside.
How standards are set
In order for the company to function effectively, financial plans are drawn up. They help, among other things, to form the working capital of the enterprise and calculate its required volume.
The standard is a changing value and is influenced by the following factors:
- volume and range of products;
- conditions for the purchase of raw materials and components;
- terms of payment and shipment of products.
In order to determine the standard and composition of an enterprise’s working capital, it is necessary to calculate the amount of necessary costs to create a product or service for a certain period. This may be a challenge due to seasonality. If the company's product is all-season, and demand for it does not depend on this factor, then it is necessary to use the annual report and take as a basis the quarter where production was at the highest level.
If a company produces a seasonal product, it is necessary to use data from the quarter in which production was at its lowest level for analysis. During the high season, the company's working capital will be formed through short-term bank loans.
Rationing is carried out in monetary terms.
Methods for assessing working capital elements
When a company receives raw materials, fuel and other supplies, that is, the enterprise's working capital, they are accounted for at full cost. The latter includes both the cost of the resource itself, as well as customs expenses, commission payments and markups, and logistics costs incurred by third-party companies performing these functions.
The price of the resources involved and the closing valuation of inventories can be determined in one of several ways:
- If the materials are unique, then the cost is determined by the cost of each unit of inventory.
- At average cost. To do this, the average cost of all available materials at the beginning of the period is estimated. The resulting value is added to the average cost of all materials and resources purchased during the period.
- The LIFO method, that is, the cost base of the earliest received materials is equal to the cost of the latest purchased materials.
- The FIFO method is based on the price of those materials that were purchased first. When using this methodology, it is generally accepted that resources are used in production in accordance with the order in which they are acquired. The ones that were purchased first will be used first. The price is taken into account at the beginning of the period.
Depending on the chosen accounting method, in the face of rising prices, you can achieve different profit indicators. So, with LIFO it will be less than with FIFO.
Fund circulation
To ensure a continuous production process, it is necessary that all material resources are in constant circulation. Depending on the stage, the working capital of the enterprise changes its form. They first move from monetary to productive, and then to commodity.
The cycle consists of three stages:
- At stage 1, the working capital of the enterprise (cash supply) is spent on the purchase of necessary raw materials and materials. Thus, cash is exchanged for inventory. But their cost is considered as an advance. Funds are not spent irrevocably, but are invested with the expectation of receiving them back when the entire cycle is completed.
- At stage 2, the product is directly created using labor and acquired resources. At this stage, value again changes its form - from production value to commodity value.
- At the third (final) stage, the finished product must be sold. This means that the commodity form will change to the monetary form. The company will receive back the funds it advanced and additional income.
Working capital of an enterprise differs from materials. They are not consumed irrevocably, but are constantly in motion. First, they make an advance to create a product, then return it after its implementation and enter a new cycle.
Valuation of working capital
To understand how competently a company manages resources in its activities and whether it is able to pay off all short-term obligations, as well as to understand where it invests its funds, an analysis of the company’s working capital is carried out.
The size of personal working capital allows you to find out whether current assets exceed existing current liabilities, as well as from what funds non-current assets are financed (own or borrowed).
Profitability indicators are used to assess a company's profitability. If the funds received from the sale of products are enough to pay off suppliers and cover all other debts, and there is still profit left, then the company is considered profitable.
Profitability indicators
These coefficients belong to the group of relative indicators, so the inflation factor does not affect them. Such an analysis system allows you to understand how much profit the company receives from each invested ruble.
Return on assets allows you to see the amount of profit a company receives from investing in assets. To do this, the indicator (amount) of net profit must be divided by the average value of assets (AV).
To analyze how effectively working capital is invested, the return on current assets indicator is used. Return on sales and return on assets data can be used. The sum of their product is an indicator of the profitability of current assets. There is another way to calculate this value. You need to divide the amount of net profit by the amount of average current assets.
To find out what the profitability of goods sold is, you need to divide the net profit by the amount of revenue received. The result will allow you to evaluate not only whether the enterprise is performing well or poorly, but also how correct the approach to pricing is. There is another way to assess product profitability - return on sales volume. To do this, the profit indicator from goods sold must be divided by the number of sold volumes (or units) of products.
To analyze how effectively an enterprise's working capital is managed, it is necessary to calculate the inventory turnover ratio (inventories). To do this, the cost value should be divided by the average inventories.
To make a comparative analysis of the rationality of the enterprise, it is recommended to compare the turnover period ratios of inventories over several years. There is a formula for calculation:
- Tob Inventory = 360 / Inventory turnover ratio.
In addition to these indicators, other profitability ratios are used: investment, equity capital, and main activity. An analysis of receivables is also carried out - its turnover rate and repayment period are assessed. The faster it is repaid, the less risk that it will not be paid at all.
About working capital management
If the company does not have enough own funds to cover all expenses, it is necessary to attract additional financing from accounts payable. When it is exhausted, you have to take out short-term loans.
If there is an acute shortage of personal working capital, there are several ways to solve this problem. The least stringent option is to obtain all possible deferments or installment plans for the repayment of existing debts.
There are estimated indicators of an enterprise's working capital that allow one to evaluate efficiency. One of them is the turnover period of working capital. It can be easily calculated:
- Tob OS = inventory turnover period + accounts receivable turnover period - average payment period for accounts payable.
We must strive to reduce inventory turnover and receivables.
To assess the financial needs of an enterprise at the current moment, their size should be divided by the revenue received from sales per day (on average) and multiplied by 100%. The result will be expressed as a percentage and will show how quickly the company earns money to cover its financial needs.
Fixed assets of the enterprise
Fixed and working capital of an enterprise are fundamental elements in the work of any company. But what are fixed assets and how do they differ from working capital?
Fixed assets are characterized by a long service life, and their share in the cost of production is partially reflected as these tangible assets wear out.
Fixed assets include buildings, structures, machines, vehicles, tools, equipment, various instruments, draft animals, and perennial plants.
Although there are some limitations. For example, inventory and tools are classified as fixed assets only if their operational life is more than 12 months, and their cost must exceed 1 million rubles. At a lower cost, they are considered as working capital of the enterprise.
Funds are usually divided into two main categories: production and non-production. The former are directly involved in the production process and are replenished through capital investments. The latter perform the function of servicing the main production, which means that their cost does not in any way affect the cost of manufactured products. But it cannot be said that non-productive assets have no influence on the efficiency of the enterprise. Investing in them helps improve the standard of living of employees, which has a positive effect on their attitude towards work processes. They serve as a good motivational stimulus.
Working capital of an enterprise is an integral part of the daily work of the company. For it to be profitable and not unprofitable, the process must be a continuous cycle. To do this, it is necessary to regularly analyze the effectiveness of their use and draw up financial plans.
