Each company has means which participate in operating activities – working capital. These are production resources which are consumed, transferred to money and form the profit of the enterprise. The success of work of the organization depends on the size of current assets.
What is working capital?
Concept which originates in works on classical economy of Adam Smith and is mentioned in Karl Marx's theory – working capital. If to translate literally, it sounds as the working means, and it is known in the modern world as working capital, these are resources of the enterprise – the monetary or production, intended for movement for the purpose of receiving profits for the reporting period. In other words, current assets of the enterprise are investments into some activity which have to bring income, at the same time they quickly arrive and also are quickly spent.
What does working capital consist of?
The type of the enterprise affects structure of current assets. In the organizations which are carrying out production activity, turnover of the capital depends on the power and production, level of material resources, hardware. The companies which appeal finance have working means in the form of monetary assets. Societies and the SP which are engaged in sales can consider current assets directly goods, products which is subject to realization. The size working capital, or working capital in balance, depends on several factors:
- size and liquidity of assets;
- the volume of the capital which is to constants and variables;
- type of assets – own or loan;
- type of economic activity.
Types of working capital
Current assets of any organization can be divided into several types. To what type to carry any given resources, it becomes clear if to define the nature of use of current assets. The capital which participates in work of the enterprise can be various:
- to constants;
- to variables;
- clean.
Constant working capital
There are means which are not changing cost, but capable to transfer it to the end result of production – both in parts, and at once. This part of funds which is allocated for purchase of materials, raw materials, the equipment – resources of the enterprise is called a constant reverse asset. This article of expenses does not join costs of the salary of employees. Still Karl Marx in the works used a concept the working constant capital at which the form of investments changes: instead of materials and raw materials there are products, at cost equivalent to the enclosed expenses.
Variable working capital
Expenses which are capable to change the cost size and are used for formation of labor force, payments of the salary are considered as variable working capital of the enterprise. The result of production does not depend on this indicator unlike investments of a constant type. The new labor is capable to increase the size of investments which was spent for its acquisition. The cost which is the working variable capital increases by the size of the additional resources called the additional price.
Net working capital
The indicator by means of which it is possible to calculate as far as the enterprise is capable to fulfill the obligations to creditors in the settlement period is a net working capital, it is necessary for the analysis of financial efficiency of the organization. At various indicators of this size it is possible to judge solvency of the enterprise. Negative and low ChOK has to set heads thinking, such data speak about the coming or come bankruptcy. A surplus of net working capital – an indicator that resources are spent inefficiently.
Phases of current assets
Finance, the equipment and raw materials participating in continuous process of production make a continuous circulation. Current assets are capable to change the form, experts allocate several phases of the working capital. Transition between phases takes place in normally working organizations imperceptibly and without serious consequences for the general process of production.
- Phase first, transformation of money into production stocks is peculiar to it.
- Phase second in which working capital in the course of production becomes goods finished to sale.
- Phase third as a result of which there are product sales and goods turns into financial savings.
Formation of working capital
Working capital is formed of various sources. The passive of the balance sheet is capable to reflect origin of current assets of the company which are divided into several types:
- Own working capital – a basis of activity of the organization, it is formed thanks to own sources, and put even in the course of creation of an authorized capital of the company. These stocks thanks to profit which is got by the organization, and liabilities – the means which are in constant circulation are replenished. Employees can carry to own means wage arrears, prepayments from buyers passing the remains of means, debts to the budgetary and other funds.
- Loan revolving business assets which represent the short-term bank credits are intended to block insignificant overexpenditures of the budget, to buy raw materials for production, to fill a lack of assets, to pay off with contractors.
- The attracted and other sources participating in turnover of the organizations are allocations, securities, assets of other enterprises. It is possible to carry various funds and reserve accounts to this type of current assets.
Working capital – efficiency indicators
Existence of working assets and their competent use helps to become the successful participant of the financial market to the enterprises. Profitability of the products which are turned out by the organization, increase in the outputs, independence of increase in inflation and taxes depends on productive management of working capital. The efficiency indicators influencing working capital exist various:
- The profitability showing degree of economic profitability from production activity depends on profit and the size of working capital.
- Duration of turnover of products which is calculated proceeding from indicators of the size of current assets of the company, the period of calculation, quantity of revenue for this interval of time. The more slowly the capital makes a revolution, the worse for the enterprise.
- The turnover coefficient – the relation of the temporary period to current assets of the enterprise, is an indicator of business activity of the organization.
Calculation of working capital
Besides the starting capital in order that business was profitable, the head should think of current assets. Without these investments it will not turn out to develop, buy adequately raw materials, to pay the salary to employees. Own working capital can be formed, using various sources. The amount of the working assets necessary for full business management, it is possible to calculate independently by several formulas, using figures from the accounting report:
- OK = Ta-Tz where OK – working capital, That is the amount of the current assets, – quantity of the current expenses.
- OK = SK+DO-VNA, where SK – the amount of equity, TO – long-term obligations (debts, the credits), VNA – non-current assets.