Denis Valentinovich Manturov Minister of Industry and Trade of the Russian ...
Working capital- these are the funds that the company has in the process of doing its business, spent during the production cycle, that is, that part of the capital that allows the uninterrupted production and sale of the product.
In the case when the functioning of the production and trading cycle is not disrupted, working capital- part of the net assets in circulation, or current assets.
In material circulation, fixed and circulating capital is what is meant by general concept capital. The first includes those factors of production that have a long service life, while the second is consumed in one cycle.
What is working capital
Working capital consists of:
- Working capital
- Circulation funds
Production assets are made up of production inventories (this can be raw materials, materials, fuel, etc.), unfinished production, as well as the costs of subsequent production.
Circulation funds are funds that are necessary for the circulation process to have the resources necessary for its functioning, as well as to service the circulation of the firm's funds.
The components of the working capital are arranged according to the principle, that is, the possibility, if necessary, to turn the funds of the enterprise into cash. This indicator determines the stability of the company's financial condition.
Functioning of working capital
Continuously renewable production reflects non-stop functioning working capital.
In the first stage (procurement) of circulating capital rotation, money becomes production stocks.
At the second stage (production), a new product is created. Consequently, the value again passes, but this time from the productive to the commodity.
At the third stage (marketing), the manufactured products are sold, and the working capital is again converted into money and, thus, returns to the first stage of the circuit.
If, after the return of capital to the starting point, its growth is observed, we can talk about or the efficiency of capital turnover. In quantitative terms, it is measured by the income received. The more efficient the working capital management, the greater the increase in profitability will occur.
Since the value of working capital is first transferred to the product and then returned again in the form of money in one turnover, it also includes objects of labor, tools subject to wear, and wages.
Sources of working capital formation
Working capital can be formed from own, borrowed and additionally attracted capital.
Equity is the difference in the value of assets and liabilities. It consists of the firm's funds and savings, as well as long-term liabilities. Normally, the working capital should be equal to about a third of the fixed capital.
Own working capital - that component of equity capital, with the help of which current assets are financed.
The borrowed capital is those funds that do not belong to the firm, but are attracted by it to carry out activities. It also consists of debts, which means those funds that the company uses temporarily.
As a rule, it is considered optimal when 50% is equity, and 50% is borrowed working capital.
Since working capital must make production continuous, in order to determine its size, organizations must know exactly not only production needs, but also what funds are needed to ensure circulation.
For this, it is precisely calculated in what amount of working capital the firm needs and the time spent by capital in the spheres of production and circulation is determined.
Capital turnover in days, the number of revolutions and the inverse turnover ratio - must be calculated in order to estimate the working capital turnover.
When a company, in order to ensure its current assets, uses all possible and available sources to cover costs, this is net working capital. Its value shows the part of the working capital, financing for which is taken from long-term sources, that is, it does not need to be used to pay off current debts.
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Working capital is distinguished by a short service life and a price that is immediately attributed to production costs (purchase of materials, raw materials, products intended for sale, components, semi-finished products). As a definition, this concept means the value expression of various products that turn around in the production process only once. At the same time, they transfer their entire price to the manufactured products, that is, they create its cost price.
Working capital is the same working capital that the organization consumes to carry out its own production activities. They differ in one feature - they are completely consumed by the enterprise during one period of the normal production cycle. All working capital consists of:
Production stocks (raw materials, semi-finished products, materials, electricity, fuel, spare parts, components; costs of work in progress; future expenses; finished marketable products).
Accounts receivable with a maturity of more than 12 months;
Cash on accounts and at the cash desk;
Short-term financial investments;
Other current assets.
There is a certain classification of working capital:
1. Revolving industrial funds, consisting of:
Production supplies (basic materials and raw materials, fuel, purchased semi-finished products, low-value and quickly worn items, auxiliary substances);
Costs of future periods;
Funds that are in production (semi-finished products of our own production).
2.consisting of:
Unsold products in warehouses;
Products shipped but unpaid;
Goods intended for resale.
Cash on accounts, in cash and securities.
The main purpose of management control is to determine the most optimal size and clear structure of these funds. You should also analyze the sources of their funding. Working capital is divided into:
Permanent - part of current assets, the need for which practically does not change throughout the production cycle; this minimum amount of current assets is a sine qua non for normal production activities.
Variable capital - additional capital required to carry out various unforeseen operations.
Net working capital is a very important ratio that is used when carrying out financial analysis of a company. It characterizes the amount of the capital that is free from all short-term liabilities. It also has another name - working capital. It is necessary for the stable maintenance of the financial stability of the organization. If the current assets exceed the value, this means that the company can easily repay these liabilities and has reserves to expand its activities.
Own working capital indicates what part of working capital finances with its own funds. Its presence and size is one of the most important characteristics of an organization's financial stability. The amount of equity capital is established as follows: the amount of short-term liabilities is deducted from the amount of current assets. The lack of this capital leads to a significant decrease in the constant and an increase in the variable part of assets. This state of affairs testifies to the growth of the financial dependence of the organization and its unstable position. The state of this indicator is reflected in which it characterizes the ratio of the value of current assets to the capital raised.
Working capital
WORKING CAPITAL
(floating capital) Funds available for doing business, including invested in publicly traded investments.
(working capital) A portion of the capital of a company that is involved in its day-to-day business activities. It consists of current assets (mainly inventory, accounts receivable and cash) minus current liabilities (mainly accounts payable). In a normal production and trading cycle - the supply of goods by a supplier, sale of inventory without prepayment, payment for goods in cash, the use of received cash to pay suppliers - working capital is an indicator of net assets in circulation, sometimes called working assets.
Finance. Explanatory dictionary. 2nd ed. - M .: "INFRA-M", Publishing house "Ves Mir". Brian Butler, Brian Johnson, Graham Sidwell, et al. General editorial: Ph.D. Osadchaya I.M.. 2000 .
Working capital
Working capital is capital that participates and is fully expended during one production cycle. Working capital includes:
- material circulating assets;
- cash;
- short-term financial investments;
- funds in current settlements.
In English: Working capital
Synonyms: Revolving fund
English synonyms: Current capital, floating capital
Finam Financial Dictionary.
Working capital
1. A part of the productive capital, the value of which is fully transferred to the produced goods and returned in monetary form after its sale. A portion of the capital of a company that is involved in its day-to-day business activities. It consists of current assets (mainly inventory, accounts receivable and cash) less current liabilities (mainly accounts payable). In a normal production and trading cycle - the supply of goods by a supplier, the sale of inventory without prepayment, payment for goods in cash, the use of cash received to pay suppliers - working capital is an indicator of net assets in circulation, sometimes called current assets.
The share of the company's capital invested in current assets, in fact, all current assets. Net working capital is the difference between current assets and current (short-term) liabilities.
2. The excess of current assets over short-term liabilities, allowing the company to finance its ongoing operations; company funds that can be quickly converted into money. Working capital is formed from Money, easily tradable securities, accounts receivable, inventories, finished goods, work in progress, materials, components and deferred expenses. The location of the components of the working capital is based on the criterion of liquidity - the ability to convert the company's funds into cash - an important indicator of the company's activities, by which the stability of its financial position is assessed.
Terminological Dictionary of Banking and Financial Terms. 2011 .
See what "Working capital" is in other dictionaries:
working capital- net working capital The difference between current assets and current liabilities. Sometimes also referred to as working capital. working capital Current assets of the company (enterprise), primarily ... ... Technical translator's guide
- (working capital) Part of the capital of an enterprise not invested in land, buildings or basic equipment. Working capital is used to maintain liquid balances, pay wages, purchase materials and expand credit ... ... Economic Dictionary
- (circulating capital, working capital) 1. Part of the company's capital that is involved in its daily business activities. It consists of current assets (mainly inventory, accounts receivable ... ... Business glossary
Working capital- (working capital, Current capital) current assets of the company (enterprise), primarily cash, stocks, receipts (gross working capital); usually we mean net working capital capital, which ... ... Economics and Mathematics Dictionary
Working capital concept of classical economics by Adam Smith. One of the basic concepts of the political economy of K. Marx. Not to be confused with the accounting term own circulating assets. Categories: CapitalEconomic termsFactors ... ... Wikipedia
The costs of raw materials, materials, labor, which are fully included in the price of products and are returned in cash after their sale ... Big Encyclopedic Dictionary
working capital- the most mobile part of the enterprise's capital, which, in contrast to fixed capital, is more fluid and easily transformed into cash. It is customary to refer to working capital as cash, easily realizable valuable ... ... Dictionary of economic terms
working capital- 1) see working capital (capital); 2) in a broad sense, circulating assets, that is, the sum of all funds in circulation at a given enterprise, both their own and others', but excluding illiquid assets (see liquidity) ... Reference commercial vocabulary
The costs of raw materials, materials, labor, which are fully included in the price of products and are returned in cash after their sale. * * * WORKING CAPITAL WORKING CAPITAL, costs of raw materials, materials, labor, which are completely ... ... encyclopedic Dictionary
Working capital- WORKING CAPITAL Short-term current assets (see Current assets), which relatively quickly turn over in the course of the economic activity of the company. Working capital is raw materials, work-in-progress and finished stocks ... ... Dictionary of Economics
Books
- Enterprise Economics (CD), Weiss Tatyana Aleksandrovna, Vasiltsov Vitaly Sergeevich, Weiss E. N .. С D (COMPACT DISC) The electronic textbook "BUSINESS ECONOMY" is intended for students and teachers of universities, heads of enterprises and organizations. It is based on educational ...
To calculate the balance sheet of the enterprise. It is these numerical characteristics that are an indicator of the profitability and well-being of the company.
Fixed and circulating capital are the summands of the part of the enterprise's capital, which is financial, material and intellectual values that are the property of the company and serve in the process of activity for making a profit. The entrepreneurial idea of the founder of the company also determines the required amount of capital.
It is known that no company can be formed and start its functioning without the initial capital, which is put into circulation at the very beginning.The successful launch of an entrepreneurial idea and the retention of a competitive position in the market by the new business depend on its correct calculation and planning of all financial operations at the initial stage. Therefore, a novice businessman, during the planning period for the implementation of his undertaking, should carefully estimate the permissible minimum and maximum possibilities of the financial resources available and necessary to achieve the goal. The determination of the required amount of the initial capital is made depending on the industrial sector in which the implementation of the business idea is supposed to be.
When calculating the required initial capital, the distribution of such capital into working capital and fixed capital is of serious importance. During planning, it is also very important to determine which is a mandatory element in calculating the initial capital.
What does the division into fixed and working capital mean?
Main capital
It includes buildings land, transport, equipment, tools, machine tools, innovative property, patents, licenses.
That is, this is the movable and immovable property of the company, which has a specific value, determined using depreciation methods. accounting for a given time period. Fixed assets have been involved in the production process for several years and transfer their value to finished products or the product in stages, over several years.
Working capital
The concept of working capital includes everything that is planned to be used for employees of the enterprise, as well as for production or sale.
The basic working capital has the following components:
Cash (salary fund, cash on hand, the amount of cash for the purchase of raw materials, materials or goods);
Material assets (short-term tools, manufacturing materials, raw materials, products or purchased goods for sale).
The ratio of working capital and fixed capital
Determining the structure and ratio of parts of working capital and fixed capital, it is necessary to take into account the proportional correspondence of all parts in its total volume. These miscalculations are of great importance when choosing to purchase a building for an office and production halls or retail space and equipment. If you do not take into account the spent finances to the amount of funds left for working capital, that is, raw materials, goods for sale, money for their purchase, funds for the salaries of employees, then the company at the very beginning may simply "suffocate", that is, stop activities. Therefore, the more the scale of the enterprise is planned, the greater the need for an increased volume of working capital.
Depending on the industrial sector, fixed and circulating capital also has a different ratio. It is determined depending on the complexity, material consumption, and labor intensity of the products.
A firm's capital turnover is the difference between the current assets owned by the company and its short-term liabilities.
Net equity
Under the term "net capital" I mean the difference between the total amount of assets on the balance sheet of the company and the amount of all liabilities. If the amount of assets exceeds the amount of liabilities, this indicates a positive net worth. Accordingly, negative net capital happens when the company has more liabilities than assets.
The net worth indicator is very important for a corporation, since a positive value indicates a stable financial condition of an economic entity. If the amount of assets significantly exceeds the amount of liabilities, the firm is highly stable. There is also relative stability - when the difference between assets and liabilities is immaterial.
Circulation of capital
Capital turnover is a process that begins with investing in production, and ends with the fact that products are produced, works are performed or services are provided. Capital turnover is an ongoing process. Its duration is determined by how quickly the advanced funds will make a full turnover and when the owner of the company will receive an effect from it in the form of cash (sometimes in the form of a social effect).
The peculiarity of capital turnover is that the funds invested by the owner in production are not fully returned. The point here is that, in addition to working capital, fixed assets are involved in the production process, which are assets that transfer their value to finished products in parts, and are also consumed over several years.
Long-term capital
Fixed assets (PP) are assets that are able to take direct or indirect participation in the production process. Their distinctive feature is that fixed assets can be used for many years, and their value is transferred to the cost price in parts by means of depreciation deductions.
These include structures, buildings, vehicles, equipment, etc.
Determination of OS efficiency
There are a number of parameters that are used in enterprise economics to calculate the effectiveness of using a firm's OS. These include the following coefficients:
- Fixed capital security.
- Armament with capital.
- Return of fixed assets.
- Capital intensity.
PF security
The first of the indicators that is used to assess the use of fixed assets is security. It is defined as the ratio of the value of fixed capital to the area of agricultural land. It must be remembered that this parameter can only be used to assess the efficiency of the funds of agricultural enterprises. The calculation of the coefficient is presented below:
- About = Ssg. / N, where
About - fund availability;
Ssg. - the cost of capital on average per year;
Psu - the area of agricultural land.
Armament
This index shows the size of fixed assets, which falls on one average annual employee of the enterprise:
- В = Ссг / К, where
B - armed with capital;
K is the average annual number of company personnel;
Ссг - the amount of fixed capital on average for the year.
Recoil
Return on assets is calculated as the ratio of all products in monetary terms, which were manufactured by the company during the analyzed period, to the cost of fixed assets for the period on average. This ratio plays an important role in assessing how effectively the company is able to use its own fixed assets. An increase in the parameter is considered a positive trend, since this means that the volume of output is growing per one monetary unit of the value of fixed capital. The normative value of the return on assets is more than one.
- From = VP / Ss.y., where
From - return on assets;
VP - all gross products of the company in monetary terms;
Ssg. - the cost of a capital on average per year.
Capacity
Capital intensity is the inverse of the return on assets. It can be calculated in the following ways:
- E = (From) -1 = 1 / From, where
E - capital intensity;
From - return on assets.
Also, the indicator can be calculated as the ratio of the amount of fixed capital to the value of gross production created during the reporting period.
- Е = (Ссг. / ВП), where
E - capital intensity;
VP - the cost of gross output, which was produced by the enterprise for the reporting period;
Ssg. - the average cost of fixed capital for the reporting period.
The enterprise needs to strive to increase the rate of return on assets. This will mean that the underlying capital is being used efficiently. At the same time, the ratio of the capacity of fixed capital will decrease.
Working capital
These are enterprise funds that take part in the production process, are fully consumed, being part of the cost of production, and are used during one production cycle. Examples of working capital can be raw materials, money, wages of the company's staff, etc.
In the company's balance sheet, working capital is displayed in the second section of the asset. The components of this type of assets are:
- Firm stocks.
- Unfinished production.
- Finished products of the company.
- Receivables.
Liquidity
Liquidity - the ability of assets to be converted into cash in order to pay off the company's current debt. This one is at the center of all the constituent components of working capital.
Each asset of the company has a different degree of liquidity. The least liquid are non-current assets. The money in the cash desk of the company and on its accounts is an absolutely liquid asset.
Liquidity indicators
All assets are divided into four categories according to the degree of their liquidity:
- The most liquid ones.
- Assets that can be sold as soon as possible.
- Assets that cannot be sold quickly.
- Difficult to implement.
Each of the four groups of assets corresponds to four groups of funding sources:
- Urgent.
- Short term.
- Long term.
- Permanent liabilities.
This classification was carried out in order to be able to determine the liquidity of the entire enterprise as a whole. A company is considered liquid when the size of each of the types of assets on the balance sheet exceeds the size of the corresponding liability.
Indicators for assessing the solvency of the enterprise
To determine the level of liquidity of an enterprise, the following indices are used:
- Coverage ratio.
- Quick ratio.
- Absolute liquidity ratio.
Each of these indices shows how quickly a company is able to convert its assets into cash in order to pay off current accounts payable.
- KP = (Rev. A - ZU) / TO, where
KP - coverage ratio (the second name of the indicator is the company's current liquidity ratio);
About. A - current assets of the enterprise;
ZU - debts of founders on contributions;
TO - liabilities of a short-term nature (current).
This indicator shows how quickly a firm is able to recover its short-term debt using only working capital.
The second indicator - urgent liquidity - reflects the firm's ability to pay off all its current liabilities if it encounters problems with the sale of products. The coefficient can be calculated as follows:
- Ksl = (TA - Z) / TO, where
Ksl - quick liquidity ratio;
TA - current assets of the firm;
З - reserves;
TO - current liabilities.
The last indicator for calculating the company's solvency is called absolute liquidity. The calculation formula is as follows:
- Cal = D / TO, where
Cal is the absolute liquidity ratio;
D - money, as well as their equivalents;
TO - current liabilities.
The value of this parameter should be approximately 0.2. This means that every day the company is able to pay off 20 percent of its current liabilities. The index shows what percentage of its obligations the company is able to pay off in the very near future.
Determination of the effectiveness of the use of working capital
As in the case of the fixed capital of the enterprise, there are indicators that characterize how effectively the company uses its working capital. There are three such parameters in total:
- Turnover ratio.
- Duration of capital turnover.
- Load factor.
Turnover and working capital utilization
The first and main indicator in assessing the efficiency of capital use is the turnover ratio. This parameter is analogous to the rate of return on assets, which is used to calculate the efficiency of fixed assets.
- Cob = RP / Oob, where
The indicator indicates how many turnovers of working capital are made in one certain period. For an enterprise, it is considered positive when this coefficient increases.
The inverse index is the load factor. It can be calculated as follows:
- Kz = Oob / RP = 1 / Kob, where
Кз - load factor;
Cob - turnover ratio;
RP - products sold in monetary terms in a certain period;
Oob - the balance of working capital.
Capital turnover
This ratio is calculated based on the turnover ratio. The calculation formula is as follows:
- Pob = D / Cob, where
Wb - the period of the working capital turnover;
D is the number of days;
Cob is the turnover ratio.
The calculation is based on the number of days in the period. It can be a quarter, a month, half a year, or a whole year. Most often, the efficiency of capital turnover during the year is analyzed.
The value of the ratio depends on the turnover ratio. A positive trend for an enterprise is a decrease in the turnover period, since this means that the turnover ratio is growing, and with it the rate of capital turnover is growing. The faster the capital rotates, the more attractive the firm is considered to be for investors.
Rate of return
The last metric commonly used to determine how capital is used is the rate of return. This indicator takes into account both circulating and basic. The rate of return of the company is calculated as the ratio of profit to the total cost of capital of the firm.
- Np = P / (Co.w. + Sob.s.) * 100%, where
Нп - profit rate;
P - profit;
SOS. - the cost of fixed assets;
Own. - the cost of working capital.
There are several ways to improve the efficiency of using working capital. First, a company can optimize its inventory. Secondly, attention should be paid to the growth rate of working capital. You should also increase the volume of sales of products. In this case, the rate of increase in sales should exceed the rate of increase in fixed assets.
The efficiency of using the capital of the enterprise seriously affects the result economic activity... Any company should strive to use its capital more rationally, which will give it the opportunity to increase the number of manufactured products and the volume of profits.
