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To calculate the balance sheet of the enterprise. It is these numerical characteristics that are an indicator of the company's profitability and well-being.
Fixed and circulating capital are the summands of the part of the enterprise's capital, which is financial, material and intellectual values \u200b\u200bthat are the property of the company and serve in the process of activity to make a profit. The entrepreneurial idea of \u200b\u200bthe 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 initial capital, which is put into circulation at the very beginning. Successful launch of an entrepreneurial idea and keeping the new business competitive in the market depends 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 business idea is supposed to be implemented.
When calculating the required initial capital, the distribution of such capital into working capital and fixed capital is of great 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 plots, 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 the depreciation methods of 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 goods 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 main 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 finances spent 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.
Working capital
WORKING CAPITAL
(floating capital) Funds available for doing business, including investments 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 the supplier, the sale of inventory without prepayment, payment for the goods in cash, the use of received cash to pay for 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 board: 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) minus 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 cash, easily traded securities, accounts receivable, inventories, finished goods, work in progress, materials, components and deferred expenses. The location of the components of 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, which is used to assess the stability of its financial position.
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 called 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 dictionary
Costs for 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 company's economic activity. 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 "ENTERPRISE ECONOMY" is intended for students and teachers of universities, heads of enterprises and organizations. It is based on educational ...
A firm's capital turnover is the difference between the current assets that the company owns and its short-term liabilities.
Net equity
By 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 occurs when the company has more liabilities than assets.
The net equity 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 lies in the fact 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 performance of a firm's OS. These include the following coefficients:
- Fixed capital security.
- Equipped 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 \u200b\u200bagricultural 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 \u003d Ssg. / N, where
About - fund availability;
SSG - the cost of capital on average per year;
Psu - the area of \u200b\u200bagricultural land.
Armament
This index shows the size of fixed assets, which falls on one average annual employee of the enterprise:
- В \u003d Ссг / К, where
B - armed with capital;
K is the average annual number of company personnel;
Ссг - the amount of fixed capital on average per 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 it means that the volume of output is growing per one currency unit of the value of fixed capital. The normative value of the return on assets is more than one.
- From \u003d 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 \u003d (From) -1 \u003d 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 \u003d (Ссг./ ВП), where
E - capital intensity;
VP - the cost of the gross output that was produced by the enterprise for the reporting period;
SSG - the average cost of fixed capital for the reporting period.
The company needs to strive to increase the rate of return on assets. This will mean that the underlying capital is being used effectively. In this case, 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 company personnel, 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.
Four groups of funding sources correspond to each of the four groups of assets:
- 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. The 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 company's solvency
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 \u003d (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;
ЗУ - 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 extinguish all its current liabilities if it has problems selling products. The coefficient can be calculated as follows:
- Ksl \u003d (TA - Z) / TO, where
Ksl - quick liquidity ratio;
TA - current assets of the firm;
З - reserves;
TO - current obligations.
The last indicator for calculating the company's solvency is called absolute liquidity. The calculation formula is as follows:
- Cal \u003d D / TO, where
Cal is the absolute liquidity ratio;
D - money, as well as their equivalents;
TO - current obligations.
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 obligations. 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 \u003d 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 \u003d Oob / RP \u003d 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 \u003d 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 decrease in the turnover period is considered a positive trend for an enterprise, since this means that the turnover ratio is growing, and with it the rate of capital turnover is growing. The faster the capital turns, 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 \u003d 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 an enterprise seriously affects the result of economic activity. Any company should strive to use its capital more rationally, which will give it the opportunity to increase the number of products and the amount of profit.
The entrepreneur invests and launches capital into production not for the sake of a one-time profit, but for the purpose of a continuous increase in capital value. This becomes possible due to the very form of movement of production assets - the form of circulation. The circulation of capital ends in the same natural form as it began, and therefore, it can be repeated over and over again.
The circulation of industrial capital (production assets), considered as a continuously repeated process, forms its turnover. Capital turnover assumes that all advanced capital will increase in value and return in its original natural form.
The time during which this process takes place is called time of capital turnover. The turnaround time depends on the specifics of the capital investment industry. In heavy industry, capital turns around, as a rule, more slowly than in light industry. Every entrepreneur is not indifferent to how soon capital will make its turnover. In order to reduce the turnaround time, measures are taken to rationalize the organization of the production process, which makes it possible to eliminate downtime. Technological innovations play an important role, allowing to speed up production processes such as wood drying, painting and drying products, catalyzing chemical reactions, etc. Reducing turnaround time also depends on the efficiency of material and technical supply, the time of transportation of products and the speed of their sale on the market.
If we compare the time of capital turnover with some conventionally accepted unit, for example, with a year, we get an idea of \u200b\u200bthe number of turnovers made by capital in a year. This indicator will characterize capital turnover rate. So, if the capital turnover time is 4 months, then the turnover rate is 3 turns per year.
Different elements of production assets make their turnover differently. From this point of view, productive capital is subdivided into main and negotiable (fixed and circulating funds).
Main capital. The material carriers of fixed capital are, as a rule, the means of labor: production buildings, machinery, equipment. The means of labor participate in the production process entirely, but transfer their value to the product in parts as they wear out. This determines the features of the turnover of fixed assets. In the course of the turnover, there is, as it were, a bifurcation of their value. One part, transferred to the product, enters the circulation process, completes the circuit and returns to the entrepreneur in cash after the product is sold. Accumulating, this part of the value forms a fund for the replacement of fixed capital, or depreciation fund.
The other part exists in the form of the residual value of the means of labor that continue to function in the production process. With the depreciation and amortization, the residual value will decrease, and the reimbursement fund will grow. The turnover of fixed capital will be completed when all parts of its value have passed their cycle and returned to the entrepreneur in cash, which will make it possible to purchase new equipment, build a new plant to replace worn out old ones. In other words, all parts of the capital will return to their original natural form and make a full turnover at value.
The intensified competition in the conditions of scientific and technological revolution forces entrepreneurs to renew fixed assets before the end of their physical wear and tear. The growing threat of obsolescence of equipment has led to the spread of the practice of accelerated depreciation, which makes it possible to form a fund for the reimbursement of fixed capital within 3-5 years. This becomes possible due to the fact that not only parts of the cost of fixed capital, actually transferred to the product due to physical wear and tear, are deducted to the depreciation fund, but also a certain share of profit. This practice makes it possible to reduce taxable profit margins, avoid the risk of obsolescence and depreciation of fixed assets, and generate significant self-financing resources necessary for further development and modernization of production. In many countries, the practice of accelerated depreciation is encouraged by the government in order to renew fixed assets.
In Russia in the 1990s, there was an intensive aging of fixed assets. The depreciation rate of fixed assets (in% of their total value) in industry increased from 36% in the 1980s to 48.5% in 1995. In many industries, the depreciation rate in 1996 was even higher: in the oil refining industry - 63% , in the chemical and petrochemical industry - 59.7%, in the fuel industry - 52.6%. The average age of production equipment in industry was 8.42 years in 1970, and in 1996 it was already 14.9 years. In 1996, 64.3% of equipment was over 10 years old against 30% in 1970. As for equipment under 5 years old, its share in 1996 was only 8.7%, while in 1970 it was it was equal to 40.8%.
The coefficient of renewal of fixed assets (introduction of new assets, in% of the total value of fixed assets) decreased from 6.0 in 1990 to 1.5 in 1996. The coefficient of retirement (liquidation of fixed assets, in% of their total value) was in 1996 also 1.5. This means that with new funds it is only difficult to maintain the previous size of the country's fixed assets.
Working capital. Material carriers of working capital are, as a rule, objects of labor (raw materials, materials, fuel) and labor, functioning in the production process.
The objects of labor are consumed completely in their natural form during one production cycle and completely transfer their value to the finished product. After the sale of goods, the value of the objects of labor is returned to the entrepreneur in monetary form with each circulation of capital. Next comes the replacement of objects of labor in kind to ensure the next production cycle. In a similar way, low-value means of labor (small tools), completely consumed in the process of one circuit, make their turn. Such elements of instruments of labor can also be attributed to working capital.
Labor power in the production process does not transfer its value to the product, either immediately or gradually. It creates new value. However, by the nature of the turnover, variable capital does not differ from working capital. The value of labor power, reproduced in the course of one production cycle, after the sale of the goods, returns to the entrepreneur in monetary form and can be used to hire labor in the next production cycle.
It should be noted that productive capital, both fixed and circulating, includes only its material elements and labor that actually function in the production process. Such a phenomenon as the purchase of materials, semi-finished products, components, equipment for the future does not fit into the practice of rational economic management and leads to the death of capital and a decrease in the rate of its turnover. The proliferation of contractual ties guaranteeing deliveries accurate to the day and hour allows a modern enterprise to work “on wheels” with a minimum stock of raw materials and supplies.
B. BEHAVIOR OF AGENTS ON THE MARKET OF PRODUCTION FACTORS
- See: Russian Statistical Yearbook. 1997. M., 1998.S. 339, 340.
Darron Kendrick is professor of accounting and law at the University of North Georgia. He received his Master's Degree in Tax Law from Thomas Jefferson School of Law in 2012, and was certified by the Alabama Board of Public Accountants in 1984.
The number of sources used in this article:. You will find a list of them at the bottom of the page.
Working capital is a collection of cash and liquid assets that are required to finance a company's activities. Knowing the amount of working capital, you can more effectively manage the company and make investment decisions. The value of working capital characterizes the ability and speed of repayment of the company's current liabilities. If a company does not have working capital or it is very modest, then most likely it will not be successful. Calculating working capital is also useful for assessing the efficient use of a company's resources. Formula for calculating working capital:
Working capital \u003d current assets - current liabilities
Steps
Part 1
Calculation of working capital- Typically, current assets and their total value are shown on the company's balance sheet.
- If the balance sheet does not have a summary of current assets, go through the entire report and look for items related to current assets. Add up the values \u200b\u200bof the points that meet the definition of current assets to get the total value of current assets. For example, add the values \u200b\u200bof the following items on the balance sheet: Accounts Receivable, Inventory, Cash and Cash Equivalents.
-
Calculate current liabilities. Current liabilities are liabilities that need to be settled within one year. Current liabilities are time liabilities, accounts payable and short-term debt.
- Typically, current liabilities and their total value are shown on the company's balance sheet. If the balance sheet does not have a summary of current liabilities, go through the entire report to find the items related to current liabilities and add up the values. For example, add the values \u200b\u200bof the following items on the balance sheet: Accounts payable, Unpaid taxes, Short-term loans.
-
Calculate the working capital. To do this, subtract the value of current liabilities from the value of current assets.
Part 2
Understanding and managing working capital-
Calculate the liquidity ratio. Many financiers use the current liquidity ratio to analyze the financial condition of a company. To calculate the current liquidity ratio, you need to know current assets and current liabilities, but as a result you will not get the amount in rubles, but the ratio.
Analyze the financial condition of the company using the current liquidity ratio. This ratio characterizes the company's ability to pay off its current financial obligations, that is, to pay its bills. Typically, this ratio is used when analyzing different companies or industries.
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Working capital management. Company executives must monitor the values \u200b\u200bof the quantities that make up working capital in order to maintain them at an optimal level. Such quantities are warehouse stocks, receivables and payables. Managers should evaluate possible positive and negative aspects associated with an excess or shortage of working capital.
- For example, a company that lacks working capital will not be able to pay off current liabilities. On the other hand, excessive working capital is also a negative indicator, since the excess capital should be invested in the development of the company to increase its profitability. For example, surplus working capital can be invested in acquiring additional manufacturing facilities or in increasing the number of retail stores. Such investments will lead to an increase in the company's income.
- If your company has a surplus or shortage of working capital, read the Tips section to learn how to reduce or increase working capital.
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Calculate current assets. Current assets are assets that can be converted into cash within one year. These assets include cash and short-term capital. For example, accounts receivable, prepaid expenses, and inventory are current assets.
