Rational use financial resources are the basis for an effective financial policy of an enterprise. If a company invests its capital in low-profit projects and operations, financial revenues from sales can quickly decrease significantly. The ability to obtain financial resources is highly valued in business. But the ability to use these funds wisely and efficiently is valued even more, because the survival and development of a business depends on it.
Financial resources are used to finance various items of balance sheet assets, so the effective use of finance comes down to asset management - working capital and investments.
Working capital management is the making of decisions regarding working capital and short-term debt obligations. Ultimately, the process of working capital management comes down to managing cash and its substitutes (securities that generate interest income and can be easily converted into cash), accounts receivable and payable, and inventory. The main thing here is to balance the inflow and outflow of funds and minimize the excess accumulation of money in the current account, accounts receivable and warehouse inventories.
Management of cash and cash substitutes associated with the retention of funds and the timely transfer of their surplus to substitutes in order to obtain additional income from temporarily available funds. If there is a shortage of funds, the reverse procedure is quickly carried out: substitutes are turned into money. Businesses are interested in retaining funds. This is necessary for carrying out normal business transactions and operations: salaries, payments to suppliers, repayment of loans and payment of interest on them, etc. total amount necessary for the enterprise cash flow depends on the reality and reasonableness of its financial plans, as well as on the normal fluctuations in the business activity of the business.
A normally operating enterprise always has a standard (reserve) of funds, which is kept in the account and used most often in case of unforeseen circumstances. This standard is tied as a percentage to the amount of working capital or as a coefficient to operating (fixed) costs. The company must always have enough money to pay all current payments. If the enterprise is young, then its cash ratio is always higher than that of enterprises with certain entrepreneurial experience. A cash crisis (shortage) should never be tolerated. It most often happens where there is no effective system for planning and managing cash flows.
There are various ways to reduce the need for funds and increase the return on their use:
1. You should not pay bills before the due date - you never know how things will turn out tomorrow, so this money may come in handy.
2. It is always necessary to orient debtors towards preferential terms of payment for obligations and strive to pay during the grace period - all this will reduce the need for attracted financial resources and significantly save money.
3. A clear and efficient bill payment procedure is required, which should link the schedules for receipt of funds from clients and payment of invoices. Schedules should be drawn up so that the money received is used directly to pay current obligations, without affecting the funds available in the accounts. This will allow you to successfully save cash, which will ensure the solvency of the enterprise at the most critical moments.
4. If an enterprise has several accounts, then regular analysis and careful control of all accounts is necessary in order to prevent excessive accumulation of free money in some accounts, while other departments with their own accounts are in need of additional funds.
5. An enterprise must always take care to speed up the receipt of money into its account from customer accounts. This is especially important for enterprises that have large clients or a large number of them in remote regions. To solve this problem, regional centers can be created, for which an account is opened in a local bank, into which money is received for the goods and services provided. Another way is for a business to rent a PO Box from the local post office and create a network of post offices in individual markets. Sometimes for these purposes, if the amounts are large, they resort to the services of airmail and special couriers. An enterprise that successfully conducts operations to receive payments on time reduces the burden of short-term debt.
Money must work - this problem is related to the identification of free or excess money and its prompt placement to generate additional income. Almost all businesses face this problem, as there are always periods when business activity increases sharply, which is accompanied by a significant increase in sales and cash flow. In addition, many firms are saving money for investment.
An enterprise can improve working capital management by transferring excess cash that does not bring it any income into highly liquid interest-bearing securities (commercial and bank bills, certificates of deposit, bonds, government securities, etc.). These transactions involve securities with varying maturities, both short-term and medium-term, as well as different kinds short-term investments. At large enterprises, these issues are dealt with by the securities manager. One of the effective methods of managing money and securities is the formation and management of a portfolio of securities, which ensures not only diversification and reduction of the risk of losses, but also a stable income on temporarily invested free funds. In addition, securities are also a kind of reserve fund in case of unforeseen circumstances. If an enterprise urgently needs additional funds, then highly liquid securities are quickly converted into cash. However, when buying securities, you need to know the state and development prospects of individual industries, the general investment climate in the stock markets, and the performance indicators of the issuing enterprises. Buying securities, unlike buying commodities, is buying expectations.
To be competitive, any business must offer commercial or consumer credit to its customers. Immediate payment or prepayment between partners is rarely practiced. Management of receivables and payables involves the development and management of an enterprise's credit policy, which usually determines the conditions and advantages of early payments on obligations and the provision of loans to its customers, and also takes into account and forms the basic requirements for its own debts and the desired conditions that the enterprise would like to receive from potential creditors. Credit standards when assessing the creditworthiness of clients and increasing their own credit capabilities are central issues of the entire credit policy of the enterprise. Here it is important to establish under what conditions and to whom the company can provide a loan and what needs to be done in order to count on receiving goods with deferred payment and on preferential terms. To answer these questions, you need to consider at least four factors. First of all, it is necessary to determine the level of profitability of transactions for the financing of which a commercial loan is used and provided. Then it is established how the conditions for granting and receiving a loan affect the increase in business activity of the enterprise and the growth of sales revenue. An important factor is also determining the likelihood of non-payment of debt obligations or violation of payment terms by a large number of clients and, accordingly, searching for ways to solve possible problems that in this regard may arise for the enterprise in front of its own creditors. Finally, when developing a credit policy, a company should always be careful and remember that its main goal is not only to expand its clientele and increase sales, but also to minimize losses from bad debts.
Effective management of accounts receivable and debt obligations is impossible without the presence of appropriate regulatory indicators, which determine the financial stability of the enterprise: standards for receivables and payables, standard ratios of general and intermediate liquidity.
The need for uninterrupted provision of production activities with everything necessary forces the enterprise not to take risks, but to create stockpiles. Everyone understands the economic unprofitability of such reserves, since thereby a part of the capital is “tied up” for a certain period of time, which could be used with greater benefit. Typically, each enterprise itself determines and ensures the volumes of inventory that are acceptable for it.
Warehouse (commodity) inventory management is designed to ensure optimal quantitative levels of inventory across the entire product range and product groups and time schedules for their movement. The main objectives of inventory management are to ensure uninterrupted and rhythmic operation of the enterprise, retain customers, minimize storage costs, and eliminate problems associated with long-term “freezing” of capital in inventory. Warehouse inventories include the accumulation of raw materials and components necessary for the smooth operation of the enterprise, finished products and goods purchased for resale in bulk or retail. The financial manager must constantly monitor inventory levels and evaluate the main directions of the enterprise's inventory policy in order to maintain an optimal balance (maintain an optimal level of capital investment in inventory). Large reserves can “bind” capital, but at the same time insure the enterprise in the event of a problem arising with an urgent increase in production and supply of products or an increase in demand for goods sold. In any case, saving on inventory allows you to free up financial reserves for other purposes. Rising inventories are considered a dangerous signal. Dynamically developing enterprises, as a rule, focus on short storage times. This allows them to have small warehouses and significantly reduce storage costs.
The inventory management process determines how many and what kind of raw materials, products or goods must be kept in stock; how often should warehouse and inventory be replenished; what needs to be done to speed up inventory turnover. (Inventory management includes analysis of inventory turnover, justification of standards characterizing their level and availability, development of delivery schedules and monitoring their implementation. When developing standards, the risk of production stoppage, the probability of the absence of individual goods, the amount of funds withdrawn from circulation, and are not based, as often happens, on the capacity of storage facilities.
An accurate assessment of inventories with a large range of goods is impossible due to the complexity of detailed accounting and double-checking systems, but financial analysis provides insight and the necessary information for organizing effective management of them; When managing inventory, average inventory turnover ratios, inventory turnover in days, average storage duration, etc. are used.
Thus, the main goal of working capital management is to maintain its minimum acceptable size, sufficient to ensure an optimal level of return on long-term investments and, accordingly, to achieve long-term business goals. If working capital consists of excessively large amounts, this may lead to a decrease in indicators characterizing the level of efficiency entrepreneurial activity. The minimum working capital limit is maintained by attracting short-term loans, which can be quickly repaid in the absence of the need for additional financing of individual operations. Temporarily free working capital can be converted into securities or placed in a savings account, which provides certain income.
IN practical activities Maintaining an optimal balance of working capital is very difficult. Working capital in cash is accumulated on the company's current account in the form of cash balances and is used to purchase raw materials, materials, goods, pay administrative and trade expenses, taxes and other obligatory payments. There should be an amount left in the current account that is sufficient for operational use. This is the main difficulty in managing financial resources; this is what the art of financial management comes down to. There should be no shortage or excess of working capital. The optimal amount of working capital for operational use is determined when developing a financial plan and is clarified during its implementation, when issues of ensuring the current balance of cash flows are resolved. A financial plan in itself is a useless document if its implementation is not monitored. Control is the basis for making operational decisions in the event of failure of planned financial transactions. The main task of financial management is to estimate future cash flows as accurately as possible.
Businesses often misidentify their needs for working capital and therefore face unexpected and unpredictable turns in the business, which can significantly change the requirements for the structure and size of this capital. In addition, the conditions for providing short-term loans often change. Reducing working capital helps increase business profitability, but at the same time increases the chances of a financial crisis. Therefore, cautious and prudent financial managers, faced with a difficult choice between the degree of risk and the level of profitability, usually, for the purpose of reinsurance, slightly overestimate the need for working capital.
Working capital– This is another indicator of the organization's liquidity. It reflects the amount of capital an organization has to carry out its daily operations and is represented by its net current assets (i.e. current assets minus current liabilities).
Working capital management – This is the process of planning and controlling the level and ratio of the company's current assets, as well as the sources of their financing. The task of working capital management is to decide what should be the maximum acceptable level of accounts receivable, the maximum possible level of short-term investments, the minimum required level of inventories, and the required level of cash at a certain point in time.
Effective management of working capital is a necessary factor for the successful development and long-term functioning of an organization. The importance of this factor can be considered both in relation to the liquidity of the organization and in relation to its profitability. Ineffective working capital management leads to the fact that cash is “frozen” in the useless and unused assets of the organization, which consequently leads to a decrease in its liquidity, as well as a decrease in its ability to invest in fixed assets and further development, and consequently to a decrease in its profitability.
Thus, the management policy (current assets) must ensure a compromise between the risk of loss of liquidity and operational efficiency. This comes down to solving two important problems:
1. Ensuring solvency. An enterprise that does not have a sufficient level of current assets may face the risk of insolvency.
2. Ensuring an acceptable volume, structure and profitability of current assets. Different levels of different current assets are known to have different effects on earnings. For example, a high level of inventory will require correspondingly significant operating costs, while a wide range of finished products can further increase sales volumes and increase revenues. Every decision related to determining the level of cash, accounts receivable and inventory must be considered both from the perspective of the profitability of this type of asset and from the perspective of the optimal structure of working capital.
There are several performance indicators for managing current assets:
1. Current ratio or coverage ratio(current ratio) - the ratio of current assets to short-term liabilities. Since this ratio shows the extent to which short-term liabilities are covered by assets that can be converted into cash within a certain period of time, approximately coinciding with the maturity of these liabilities, it is used as one of the main indicators of solvency. According to generally accepted international standards, it is believed that this coefficient should be in the range from 1 to 2 (sometimes 3). Analysis of the dynamics of this indicator is especially important.
2. Quick current ratio(quick ratio) - the ratio of the liquid part of current assets to short-term liabilities. This is a special case of the current liquidity ratio, revealing the ratio of the most liquid part of current assets (cash, short-term financial investments, accounts receivable), which is calculated as the difference between current assets and inventories, to short-term liabilities. According to international standards, its level should be higher than 1. In Russia, its optimal value is defined as 0.7-0.8.
3.Absolute liquidity ratio(absolut quick ratio) - the ratio of cash to short-term liabilities. In the West, this indicator is rarely calculated. In Russia, the optimal level of the absolute liquidity ratio is considered to be 0.2-0.25.
4. Net working capital(net current assets) - the difference between current assets and short-term liabilities. Net working capital is required to maintain financial stability enterprises, since the excess of current assets over short-term liabilities means that the enterprise not only can pay off its short-term obligations, but also has sufficient financial resources to expand its activities. The presence of net current assets serves as a positive signal for investors and creditors to invest in a given enterprise.
5. Inventory turnover ratio(inventory turnover) - the ratio of sales revenue to inventories; reflects the speed at which a company's inventory is sold. The higher this indicator, the less funds are tied up in this least liquid item of working capital, the more stable the financial position of the company is considered, which is especially important if there is significant debt.
6. Accounts receivable turnover ratio in days(days sales outstanding, DSO) - the average period of time during which a company, having sold its products, expects the receipt of money. It is calculated as the ratio of accounts receivable to average daily sales revenue (sales revenue divided by 360 days). This indicator reflects the conditions under which the company sells its products. It shows how many days on average the company will receive money for shipped products (if this period is longer than stipulated in the contract, it is worth reconsidering its relationship with customers). Naturally, the high value of this indicator indicates significant benefits provided to clients of this enterprise, which may cause caution among creditors and investors. It is useful to compare this indicator with accounts payable turnover in order to compare the terms of commercial lending that a company uses from other companies with the terms of credit that it offers to other companies.
This note was written as part of the course. It discusses ways to evaluate and analyze working capital management activities by calculating various business ratios. The ratios are calculated based on accounting and management accounting data.
Working capital is the capital available to conduct the day-to-day operations of a company, usually the excess of current assets over current liabilities.
From an accounting point of view, this is a static representation of the financial position, characterizing the excess of the sum of permanent capital and long-term liabilities over the non-current assets of the company at a certain point in time. Accordingly, the above depends on accounting rules, in particular how capital, income, retained earnings, the line between long-term and short-term (twelve months after the end of the statutory reporting period) are defined and when income should be recognized.
Download the note in or format, examples in format
If working capital, defined in this way, exceeds net current assets (inventories plus accounts receivable minus accounts payable), then the company has excess cash (usually in the form of bank deposits and investments); otherwise the company is short of cash (usually in the form of a bank loan and/or overdraft). On this basis, working capital management is divided into areas related to , accounts payable, and .
The company must earn cash in an amount sufficient to cover immediate obligations and, accordingly, to continue business activities. An unprofitable company can operate for a long time if it has access to sufficient liquid resources, but even a highly profitable company will not be able to operate if it does not have adequate liquid resources. Thus, working capital is necessary for the success and development of a company in the long term, and the more current assets cover current liabilities, the more stable the company is financially.
Effective management of working capital is important from both a liquidity and profitability perspective. Poor working capital management means that funds are used inappropriately in idle assets, thereby reducing liquidity and the ability to invest in productive assets such as equipment and machinery, which impacts profitability.
The company's working capital policy is based on two decisions:
- The first decision is regarding the appropriate level of investment, the set of current assets, for a given volume of activity. This .
- The second decision is regarding the method of financing this investment. This is a funding decision.
Investment decision. All companies require working capital to one degree or another. In fact, the required volume depends on many factors, such as how long the company has been in the market, the company's field of activity, credit policy and even the time of year. There are no standards in determining working capital requirements. It is important that an appropriate amount of working capital is budgeted in an amount sufficient to cover planned needs. An incorrect budget can result in a company's inability to meet obligations when payments fall due. If a business finds itself in this situation, it is considered technically insolvent. In times of uncertainty, companies need to maintain some minimum level of cash and inventory, based on projected sales revenue, plus additional safety stocks. At aggressive In accordance with its working capital policy, the company has minimum safety reserves. This policy minimizes costs, but may reduce sales revenue because the company may not be able to quickly respond to growing demand. And vice versa, conservative Working capital policy requires large amounts of safety stock. In general, the expected return under a conservative policy is lower than under an aggressive one, but the risks are higher under an aggressive one. Moderate the policy is intermediate between the extremes in terms of risks and returns.
Financing decision
The decision to finance working capital requires determining the mix of long- and short-term debt. There is a fundamental difference between cash and inventories on the one hand, and accounts receivable on the other. In the case of cash and inventories, a high level means reserve reserves and a more conservative position. Safe there is no level of accounts receivable and a high level of accounts receivable relative to sales revenue usually means that the company provided loans on less stringent terms. If aggressive is a synonym risky, then the reduction in inventory and cash levels will be aggressive, but the increase in accounts receivable will also be aggressive.
Working capital financing depends on how the financing of current and non-current assets is divided between long-term and short-term sources of financing. There are three possible approaches (for more details, see the description):
- Conservative politics- this is a policy in which all permanent assets, both non-current and the permanent part of current ones (i.e. the bulk of investments in inventories and receivables, etc.), are financed through long-term financing. Short-term financing is used only for part of the variable current assets. Conservative policies are the least risky but result in the lowest expected returns.
- Within aggressive policy Short-term financing is used to finance all variable current assets and some of the fixed portion of current assets. This policy has the highest risk of illiquidity, as well as the highest level of return (since short-term financing costs are usually less than long-term financing costs).
- When conducting moderate(or a policy that coincides in terms of terms), short-term financing is selected for variable current assets, and long-term financing is selected for a constant part of current assets and non-current assets.
Working capital ratios
Working capital management can be analyzed using ratio analysis. The coefficients were discussed in detail earlier (see). For the purposes of working capital management, liquidity ratios and ratios characterizing the cash cycle are used. Let us briefly recall the formulas by which these coefficients are calculated:
Accounts receivable turnover= Accounts receivable * 365 / Revenue,
that is, the average duration of loans (in number of days) issued to customers.
Inventory turnover= Inventories * 365 / Cost of goods sold, that is, the average number of days of inventory storage from the moment of receipt from suppliers to the moment of sale to customers.
Accounts payable turnover= Accounts payable * 365 / Cost of goods sold, that is, the average duration of loans (in number of days) provided by suppliers.
Along with turnover (in days), turnover ratios are used, showing how many times the asset “turned around” during the year. For example,
Accounts receivable turnover ratio= Revenue / Accounts receivable.
Liquidity ratios are financial indicators that characterize the solvency of a company in the short term, its ability to meet obligations in a rapidly changing market environment and business environment.
Current ratio= Current assets / Current liabilities
Quick liquidity ratio= (Current assets – Inventories) / Current liabilities
Consider the following example.(If you can independently determine three turnover ratios and two liquidity ratios, then you have understood the material and can move on. If you encounter difficulties, re-read the relevant sections.) In Fig. 1 shows the profit and loss statement and balance sheet of the trading company Alpha for 2012. Calculate the turnover of receivables, payables and inventories, as well as current and quick liquidity ratios.
Rice. 1. Profit and loss statement and balance sheet of the Alpha company for 2012; thousand dollars
The calculated coefficients are presented in Fig. 2.
There are no generally accepted standards for coefficients. “Ideal” metrics vary from industry to industry. For example, a trading company may buy on credit and sell for cash. Thus, the company will have virtually no accounts receivable other than credit card payments and a small amount of inventory. As a result, current and quick ratios will be quite low. Unlike a trading company, a manufacturing company stores inventory at various stages of production, from raw materials to finished goods, and makes most or all of its sales on credit. As a result, both liquidity ratios will be higher. When analyzing liquidity ratios, the absolute figure for a given year is not as important as the trend over several years. It is important to assess whether a company's liquidity is improving or deteriorating over time.
Turnover ratios provide an opportunity to assess how well a company manages its working capital components. For example, Alpha Company holds an average unit of inventory for 37 days before it is sold. Of course, it is desirable to reduce this period as much as possible. The shorter the inventory turnover period, the faster the inventory turns into cash. However, the inventory turnover ratio may be too low. It's easy to downgrade: the company can simply let inventory run out. But this may be short-sighted if it results in downtime caused by inadequate inventories of materials, components or finished goods. Likewise, inadequate inventories of finished goods can cost a company's business success and reputation if it is unable to meet customer demand. It is difficult to say whether 37 days is a “good” or “bad” indicator. It would be useful to compare Alpha's performance with that of a similar company or with Alpha's performance in previous years.
The repayment period for Alpha's receivables was 46 days. Just as in the case of the previous coefficient, it is advisable to reduce this period as much as possible. If customers pay as quickly as possible, this is good for the company's cash flow. However, insisting on prompt payment can be difficult. This practice can ruin a company's relationship with customers. In general, most companies offer payment within 30 days of delivery of goods. Most clients delay payment for some time exceeding this period. Alpha's ratio looks good: customers aren't too late in paying, and there's no sign that Alpha is putting undue pressure on its customers.
If a company sells goods for cash and on credit, the trade receivables figure should be divided only by the proceeds from sales on credit. If it is not possible to isolate this amount from total revenue, then the coefficient will be distorted.
There may be differences of opinion as to which accounts receivable indicators (i.e., year-end, mid-year, or annual average) will be most informative. The most important thing is a consistent approach when calculating indicators for each year.
The average duration of settlements with Alpha company suppliers was 69 days. In parallel with receiving funds from customers as quickly as possible, the company should try to postpone settlements with suppliers. In fact, such actions are equivalent to attracting an interest-free loan for partial financing of working capital. Here, as in the previous case, the company should act carefully. If a company develops a reputation for being a chronically late payer, it may have difficulty obtaining credit. The Alpha coefficient is a little over 2 months, which is not critical, but still quite long.
Official financial statements usually do not reflect the amount of purchases. An approximate estimate of accounts payable turnover can be made using the cost of sales indicator as a substitute. Remember that the calculations should only include accounts payable to suppliers, not including taxes, interest and other accounts payable (for example, to customers)
Money cycle
Turnover ratios are related to liquidity ratios. The cash cycle shows how long funds are blocked in current assets. Money cycle- this is the period of time between the company’s investment in raw materials, wages and other costs, and the influx of cash from the sale of goods. In some cases, this cycle is called the working capital cycle or operating cycle. This is an important concept for cash and working capital management because the longer the cash cycle, the more financial resources a company needs. Company management must ensure that the cycle is not too long.
For manufacturing enterprise cash cycle: raw material inventory turnover period - (minus) accounts payable turnover period + time to produce goods + time that goods are stored as finished goods inventory + accounts receivable turnover period. For trading companies, to which our Alpha belongs, the cash cycle is calculated using a simpler formula (Fig. 3). Logically, this can be explained as follows: inventory can only turn into cash after it is sold and the customer pays for the goods. On the other hand, cash is actually invested only after the company pays the supplier for the goods. Thus, the working capital of Alpha Company is 37 + 46 – 69 = 14 days. This means that the company's cash is locked in each item of inventory for 14 days until it can be returned (at a profit).
Rice. 3. Alfa Company Cash Cycle (the scale is slightly distorted to accommodate the required text)
Independently determine the duration of the cash cycle of the Davis manufacturing company, as well as all the components of this cash cycle (Fig. 4). The answer is at the end of the note.
Rice. 4. Initial data for calculating the cash cycle of the Davis company; dollars
Overtrading (excessive expansion of trading activity)- This is the state of a company that takes on obligations that exceed its short-term resources. This condition can occur even if the company is trading profitably.
Companies are especially at risk of overtrading when they grow rapidly or when they stop raising long-term financing. Additional inventory and accounts receivable are financed by increased accounts payable. To expand activities, additional non-current assets may be required, which will be paid for from current assets, which reduces working capital. If this state of affairs continues for too long without raising additional long-term financing, the company may face cash flow problems. She may be unable to fulfill her obligations on time, and, despite the fact that trading activity is carried out at a profit, the company may go bankrupt.
Signs of overtrading include:
- Revenue growth
- Growth of inventories and receivables
- Growth of current and non-current assets
- Growth of assets financed by credit funds
- Current liabilities exceed current assets, current and quick liquidity ratios decrease
The problem can be solved by attracting additional long-term financing.
Shortening the cash cycle
There are a number of things you can do to shorten your cash cycle:
- Reduce raw material inventories. This can be done by analyzing slow-moving items, repeatability and order sizes. You can apply inventory control methods if they are not already in use. Working more effectively with suppliers can also help. Decreasing inventory may result in loss of discounts on large purchases, loss of cost savings due to price increases, and may result in production delays due to inventory shortages.
- It is preferable to obtain additional funds from suppliers by delaying payments in agreement with them. This can lead to deterioration in business relationships or even the loss of reliable suppliers. In addition, such a policy may result in the loss of discounts.
- Reduce the volume of work in progress by improving technology and production efficiency (with all the personnel and other problems that accompany such changes).
- It is possible to reduce finished product inventories by reorganizing the production scheme and distribution methods. This may impact the effectiveness of meeting customer requirements, ultimately resulting in lower sales revenue.
- Reduce customer credit through invoicing and faster tracking of outstanding amounts, as well as possible incentives with discounts. The main disadvantage is the potential loss of customers due to excessive pressure on them and loss of income due to discounts.
- Use debt factoring, the rapid creation of cash flow by selling receivables to a third party for immediate cash payment.
The cash cycle is simply the period of time between the costs of production and the receipt of cash; by itself it does not say anything about the amount of working capital that will be needed during this period.
Answer to the problem (for conditions, see Fig. 4):
Working capital is funds invested in the current assets of an organization, cyclically renewed for the continuity of the process of activity of an economic entity.
Working capital turnover depends directly on the business sector. For a company extracting and selling drinking water, turnover will be very high, unlike a company engaged, for example, in the construction of nuclear icebreakers, where one cycle can stretch for 5-10 years.
To understand the methodology for forming current assets in the capital of an enterprise, you need to rank according to the method of forming working capital, so:
A) Gross current assets is the total amount of working capital in the organization. That is, all working capital formed both from own capital and from attracted credit resources.
Where SAI- gross current assets
SOA- current assets formed at the expense of the enterprise’s own funds
ZK- current assets formed through borrowed capital.
But, since Borrowed Capital = Short-term (Current) Credits and Borrowings + Long-term Credits and Borrowings (do not forget that we are talking only about funds in working capital), then our formula will take the form:
B) Net current assets- that part of the company’s current assets that is formed from its own funds and “long-term” money, that is, long-term loans.
This can be expressed in the formula:
B) Own current assets- an even smaller component of gross current assets, formed exclusively at the expense of the enterprise’s own funds.
The amount of a company's own working capital can be calculated as follows:
Current assets are subject to classification according to types and methods of their formation.
By type of current assets can be classified as follows:
- Stocks of raw materials, materials and semi-finished products, that is, what ensures the continuous production process at the enterprise.
- Inventories of manufactured, finished products, that is, products already in the warehouse, ready for sale, as well as the volume of partially completed products (you must indicate the coefficient or percentage of the degree of completion).
- Current accounts receivable, that is, the amount of debt in favor of the enterprise for goods or services supplied, advances issued, etc.
- Monetary assets those. cash balances in national or foreign currency (in all forms), as well as short-term financial investments, which can be considered as additional income from the placement of available funds - speculative cash balance.
- Other types of current assets
Based on the nature of participation in the operating process, current assets are subject to the following classification:
- Current assets serving the production cycle of the enterprise - that is, directly related to the stages of production (raw materials, materials, semi-finished products, finished products and work in progress)
- Current assets serving the financial cycle- the totality of the enterprise's inventory and the amount of accounts receivable, minus the amount of the company's accounts payable.
Based on the period of operation of current assets, we highlight:
- 1. The permanent part of current assets, that is, that part for which the organization constantly needs in the same volume, any fluctuations in the form of seasonality, etc.
- 2. Variable part of current assets,- that is, that additional part of them that is formed due to seasonality, attracting third-party orders, etc.
Of course, you don’t need to know and remember all the types and classifications. Each manager chooses for himself the option that is more convenient for him to use in business at one time or another.
Circulation of working capital in business.
During the operation of the enterprise, working capital sequentially passes through four stages, replacing each other and making up the operating cycle of the enterprise.
Stage 1. Current assets are used to purchase raw materials and materials.
Stage 2. During the production process, raw materials are transformed into final products ready for sale.
Stage 3. Products sold are transformed into short-term accounts receivable (i.e., there has not yet been a payment in cash or non-cash form).
Stage 4. Short-term receivables are collected into cash, which the company is again ready to spend on the purchase of raw materials.
The operating cycle is the period of one full turnover of Gross Current Assets from the moment of acquisition of raw materials inventories to the moment of collection (payment) of short-term receivables by buyers.
The most important characteristic of the operating cycle is its duration - the period from the purchase of raw materials to the collection of receivables.
In fact, depending on how many cycles a company is able to produce per unit of time, everything else in its existence will depend. Whatever the business, the owners always try to take care of increasing the turnover of current assets.
The duration of the operating cycle of an enterprise can be determined using the following formula:
POTs = POMz + POGp + PODz, Where
POC- duration of the operating cycle (in days);
POmz- duration of turnover of stocks of raw materials, materials, semi-finished products, etc. (in days);
POgp- duration of turnover of finished goods inventories (in days);
POdz- duration of collection of short-term receivables (in days).
That is, in essence, this formula is nothing more than the summation in days of the passage of current assets through four stages from the stage of raw materials to the stage of receiving funds.
This process can be divided into two components:
1. Production cycle of the enterprise, that is, this is the period from the moment of purchase of raw materials and materials until the moment of shipment of finished products to customers
In the form of a formula, the duration of the production cycle of an enterprise can be expressed as follows:
PPC = POsm + POnz + POgp, Where
PPC
P.S.- turnover period of the average stock of raw materials (in days);
POnz- the turnover period of the average volume of work in progress (in days);
POgp- turnover period of the average volume of finished goods inventory (in days).
2. Financial cycle of the enterprise- more complete and includes the production cycle. The financial cycle is the period of time between the company's repayment of accounts payable to counterparties for the supply of raw materials and materials until the repayment of accounts receivable by buyers for the products supplied to them.
The duration of the financial cycle can be calculated using the following formula:
PFC = PPC + POdz - POkz, Where
PFC- duration of the financial cycle (in days);
PPC- duration of the production cycle (in days);
POdz- average turnover period of current accounts receivable (in days);
POkz- average turnover period of current accounts payable (in days).
This is how you can represent these cycles on the time axis:
The logic of the presented scheme is as follows. The operating cycle is the total time during which financial resources are immobilized in inventories and receivables. Since the company pays the bills of its counterparties with a delay (accounts payable), the time during which funds are withdrawn from circulation (financial cycle) is less than the average time of circulation of accounts payable.
Having decomposed the activities of our own company into such components, we get very convenient and powerful tools for managing our business. This division allows you to identify weaknesses in existing business processes. Looking at the company “from above” it is impossible to “by eye” identify problem areas or, conversely, areas that do not require attention. this moment improvements.
Working capital management
The working capital management process is logically structured according to the following scheme
- We analyze the current assets of the enterprise in the previous period and compare them with the results of the company’s activities
- Choosing a policy for the formation of current assets today
- We optimize the volume of current assets of the enterprise
- We optimize the ratio of the constant and variable parts of the company’s working capital
- We provide the required liquidity of current assets
- We ensure the necessary profitability of current assets
- We determine the sources of formation of current assets
Let's look at each stage in more detail.
1. Determining the company's supply of current assets and identifying ways to improve the efficiency of their use.
This requires:
1.1. Determine the dynamics of changes in the average volume of current assets and compare the obtained values with the dynamics of product sales and the average amount of all assets. Calculate the dynamics in absolute and specific values. In other words, it is necessary to determine the degree of correlation, the dependence of one quantity on a change in another. This type of analysis can be carried out with one function in Excel.
1.2. Next, it is logical to carry out the analysis in more detail and, having decomposed the company’s current assets into its components, determine the degree of correlation of the rate of change in volumes of each type with the dynamics of changes in sales volumes. This type of analysis will allow us to determine the degree of liquidity of each type of current assets.
1.3. The next stage examines the turnover of each type of asset and the total amount of all assets. To do this, you need to apply the asset turnover ratio, as well as determine the period of their turnover. Thus, we will be able to determine the duration of the entire cycle and its components: operating, production and financial cycles.
It is also important to consider the factors that have the greatest, average, and least impact on the duration of these cycles.
Return on Current Assets (RCA)- demonstrates the enterprise’s capabilities in ensuring a sufficient amount of profit in relation to the company’s working capital used. The higher the value of this ratio, the more efficiently working capital is used.
Calculated using the formula:
RCA = Net profit/Current assets
To look at it from a different point of view, you can use the Dupont model:
1.5. At the final stage, it is necessary to consider the composition of the main sources of financing of current assets: the dynamics of their amount and share in the total amount of funds invested in assets.
Such a detailed analysis makes it possible to assess the quality of management of current assets in the past period and identify goals and methods for achieving them for the coming period.
2. Policy for the formation of the company’s current assets
The main task in working capital management is to determine its optimal value and optimal structure according to the stages of the liquidity level cycle and sources of formation for the continuous and targeted performance of its functions.
In the process of determining the required amount of current assets, it is necessary to remember that there are 2 groups of risks:
- Loss of revenue
- Loss of efficiency
Schematically, these risks and options for optimizing the value of assets are visible in the graphs:
Working capital is formed from our own sources of financing and borrowed funds.
When forming working capital, it is advisable to be guided by the following rule:
The permanent component of the company's working capital should be provided from its own funds, and the temporary part of its assets - from borrowed funds.
In the theory of financial management, one can find three main strategies for the formation of current assets:
1. Conservative approach
As the name suggests, it implies not only full provision with current assets at any time, but also the creation of significant reserves in case of unforeseen situations. This approach provides maximum business protection.
Under the conservative option, the permanent part of working capital and the temporary part are covered from own sources, and the temporary part is covered by borrowed funds.
This option has both pros and cons.
pros
- Ease of raising funds
- The company has a high level of sustainability and a low level of possible bankruptcy
- The company receives a relatively large amount of frequent profit
Minuses
- Limited opportunities for economic growth
- The enterprise has less ability to respond to changes in market conditions.
2. Moderate approach
It is expressed in the full provision of all needs for current assets and the creation of a normal level of insurance reserves.
3. Aggressive approach
In conditions of stable business and, what is very important (!!!), a predictable near future, an aggressive approach involves minimizing all reserves of current assets. In the absence of failures, this approach provides maximum efficiency in their use, but the risks are very high.
pros
- With a good credit condition, the company is not limited in its development opportunities
- Can respond more flexibly to market changes
Minuses
- The company depends on creditors
- Low level of financial stability and high level of potential bankruptcy
However, it is necessary to control the level of sufficiency of own funds.
the value of which cannot be lower than 0.1, that is, at least 10% must be own funds. But if it is still less, then you can begin bankruptcy proceedings for the organization.
Optimization of the volume of current assets
Performed in three steps.
1. Taking into account the results of the analysis of current assets, we determine ways and opportunities for reducing production, financial and operating cycles.
2. Taking these data into account, we determine by type a sufficient level of current assets.
In general, where strict formalization of processes is required, it makes sense to introduce standards: for every three hours of machine operation, X kg of raw material A and 1/3*x of raw material B are required. Something like this...
3. Having calculated sufficient volumes of current assets for each type, we can determine their total volume for the coming period. And, accordingly, include in the budget the necessary planned procurement costs.
The formula works:
VOA = ZSp + ZGp + DZp + DAp + Pp, Where
SAI- the gross volume of current assets of the enterprise at the end of the period;
ZSp- the amount of stocks of raw materials and supplies at the end of the period;
ZGP- the amount of finished goods inventories at the end of the upcoming period (including the recalculated volume of work in progress);
DZp- the amount of accounts receivable at the end of the period;
DAp- the amount of monetary assets at the end of the period;
pp- the amount of other types of current assets at the end of the period.
4. Optimization of the ratio of constant and variable parts in the total amount of current assets
In almost any business there are seasonal fluctuations, that is, ups and downs in product sales. The phenomenon is explained by the seasons, church and public holidays, work schedules, etc.
Naturally, when forecasting volume, it is necessary to take into account such cyclical fluctuations.
Optimization is performed in several steps:
1. Based on data from past years for each period under study (the accuracy of the analysis is directly proportional to the detail of the sample), we calculate the coefficients of uneven distribution.
In a simple version, this can be done using the following formulas:
Next step. We determine the average and maximum volume of the variable part of current assets in the coming period:
5. Ensuring the necessary liquidity of current assets
For these purposes, according to the payment schedule, it is necessary to rank current assets by categories of cash, high- and medium-liquid assets and determine the shares of the corresponding groups in the total volume of current assets.
6. Security required profitability current assets.
Any assets must generate profit for the enterprise. The same statement applies to current assets when they are used in the operating cycle.
Temporary surplus funds should be used to form a portfolio of short-term financial investments
7. Forms and sources of financing current assets
Methods for forming financing of current assets are also subject to management. The structure of funding sources also requires optimization.
In the process of managing current assets at an enterprise, separate financial standards are developed, which are used to control the efficiency of their formation and functioning.
But more on this in the following articles.
Analysis of the dynamics and structure of sources of financing, receivables and payables of the enterprise, the level of profitability and turnover of working capital. Study of working capital management problems and ways to improve it.
Send your good work in the knowledge base is simple. Use the form below
Students, graduate students, young scientists who use the knowledge base in their studies and work will be very grateful to you.
Posted on http://www.allbest.ru/
EDUCATIONAL INSTITUTION OF TRADE UNIONS OF HIGHER PROFESSIONAL EDUCATION
"ACADEMY OF LABOR AND SOCIAL RELATIONS"
DEPARTMENT OF FINANCIAL MANAGEMENT AND FOREIGN ECONOMIC ACTIVITIES OF ENTERPRISES
COURSE WORK
In the discipline "CORPORATE FINANCE"
On the topic: “Company working capital management”
Zatsepina Polina Sergeevna
Faculty of MEFIS
Day department,
group ME-BE-0-12-2
Moscow, 2014
Introduction
3.2 Measures to improve working capital management of Rozmysl LLC
Conclusion
Bibliography
Introduction
The economic activity of any organization requires the availability of certain sources of financing for the acquisition of material and property resources necessary for the production process. The economic basis for the development of an organization is capital; it characterizes the total cost of funds invested in the formation of assets and ensures the efficiency of economic activity.
Capital is one of the main factors of production; it represents all the means of production that are created in order to produce goods and services with their help. By investing in the economic activity of an organization, the investor expects to receive a certain profit; making a profit is the main goal of any organization.
Working capital of an organization is capital invested in working capital, its main purpose is to ensure the smooth and rhythmic operation of the organization.
Working capital is an integral part of the process of current production and operating activities, which determines the need for its planning.
Working capital planning is carried out to determine sources of financing, since a lack of working capital can stop the production process, and an excess of working capital leads to irrational use of the organization's resources.
Having reliable information about the need for working capital in the near future, the organization can determine sources of financing this need.
The amount of working capital of an organization is constantly changing, since the organization is constantly producing business transactions, ensuring the production process, which is why working capital planning is necessary.
In order to determine how much the change in working capital will occur, the need for working capital is calculated; this calculation makes it possible to determine the sources of financing for the increase in working capital.
Determining the optimal level of working capital is one of the main tasks of financial management. When the amount of working capital is below the required level, the organization will be short of cash and have a low level of liquidity. If there is a large excess of current assets over current liabilities, then liquidity increases, but the excess of the required working capital reserves leads to a slowdown in their turnover and reduces the amount of profit.
Working capital management is aimed at ensuring the financial stability of the organization and requires determining the optimal volume and structure of working capital, which is associated with the selection of the optimal structure of sources of financing of working capital.
In this work, working capital is the organization’s capital necessary to finance current assets; its value is equal to the cost of working capital.
Purpose of the work: to study the working capital management process and develop measures to improve it.
To achieve the goal, it is necessary to solve the following tasks:
1. Reveal the essence and structure of working capital.
2. Study methods of working capital management at Rozmysl LLC.
3. Consider ways to improve working capital management.
Object of study: working capital of Rozmysl LLC.
Subject of research: the process of working capital management.
In the research work, the principles of logical and systematic approaches, techniques of inductive and deductive methods were used. Within the framework of the systems approach, methods of analysis and synthesis, grouping and comparison, scientific abstraction and modeling are used; Calculation and analytical methods were used in the practical part of the study.
The presented material consists of an introduction, three chapters of the main part, a conclusion, and a list of references.
The introduction substantiates the relevance of the stated topic, formulates the goal, objectives, subject and object of the study.
The first chapter is devoted to the study of the economic essence of the working capital category; consideration of the mechanism of its functioning at an industrial enterprise, it examines theoretical issues of working capital management, the current level of development of working capital management systems.
The second chapter provides a brief description of the organization under study and analyzes the effectiveness of working capital management in the organization under study.
In the third chapter, based on the conducted research, the problems of working capital management identified during the research are solved.
The conclusion contains a generalized presentation of the problems considered in the work and proposals for using the results obtained.
At the end of the work, a list of literature used in the research is given and the documentation of the organization used in the research is attached in the appendix.
Chapter 1. Theoretical aspects company working capital management
1.1 Essence, composition and structure of working capital and working capital
Capital is the value of the means of production in monetary form used to generate profit. Capital, which completely exhausts its function in the production of its one-time use, is called circulating capital (raw materials, materials, energy resources) Savitskaya G.V. Methodology for comprehensive analysis of economic activity. - M.: Infra-M, 2007. - 378 p. .
The structure of working capital depends on the specific purpose of financial management. The classification of working capital components can be carried out:
By degree of liquidity;
By functional role in production;
According to the degree of risk of capital investment;
By funding sources.
An enterprise's need for working capital depends on many external and internal factors.
The amount of working capital is determined not only by the needs of the production process, but also by random factors. Therefore, it is customary to divide working capital into constant and variable Khakhonova N.N. Accounting, audit and analysis of cash flows of enterprises and organizations. - M.: MarT, 2007. - 24 p. .
Constant working capital can be defined as the minimum required to carry out production activities. This approach means that an enterprise needs a certain minimum of working capital to carry out its activities, for example, a constant balance of funds in a current account.
Variable working capital reflects additional current assets needed during peak periods or as safety stock. For example, the need for additional inventory may be associated with maintaining a high level of sales during seasonal sales. At the same time, as sales proceed, receivables increase. Additional funds are needed to pay for supplies of raw materials, as well as labor activity preceding a period of high business activity.
Based on sources of financing, working capital can be divided into equity and borrowed capital.
The main purpose of working capital is to ensure the availability of working capital to ensure the continuity and rhythm of the production process.
The movement of working capital can be presented in the classical form:
D-T...T-P"...T"-D".
Like any capital invested in production, the working capital of an enterprise begins its movement with the advance of a certain amount of money (D) for the acquisition of production inventories (PP): raw materials, materials, fuel and other items of labor that are used for the production of certain goods Yarkov V. IN. Arbitration process: textbook. - M.: Wolters Kluwer, 2007. - 178 p.
At the first stage (D-T), cash or preparatory, working capital goes from the form of cash to the form of inventory. At this stage, a transition occurs from the sphere of circulation to the sphere of production, and the advanced value passes from monetary to production (D-PZ). The completion of the first stage interrupts the circulation of goods (in the circuit diagram it is shown as an ellipsis), but the process of circulation of working capital continues.
The second stage of the circuit (T-P-T") takes place in the production process. It consists of the transfer of values, production stocks, purchased material assets, production stocks, the combination of means and objects of labor with labor and the creation of a new product that incorporates transferred and newly created value.
At this stage of the circuit, the advanced value again changes its form. From the productive form it goes into a commodity form, and according to its material composition, from material production reserves it first turns into unfinished products, and then into finished products (PZ-P-GP).
The third stage of the circulation (T"-D") consists of selling manufactured products and receiving funds. At this stage, working capital moves from the production stage to the circulation stage and again takes the form of cash. The interrupted commodity circulation is resumed, and the advanced value passes from the commodity form into money. Advanced funds are restored from the proceeds received from the sale of products. The difference between D" and D is the amount of cash income and savings or the financial result of the economic activity of the enterprise. The monetary form that working capital takes at the final stage of the circulation is at the same time the initial stage of capital turnover.
Circulation is a process that occurs constantly and represents the turnover of capital. Having completed one circuit, working capital enters a new one, i.e. the circuit occurs continuously and there is a constant change in the forms of advanced value. At the same time, at each given moment of the circulation, working capital functions simultaneously in all stages, ensuring the continuity of the production process. Advance cost various parts simultaneously exists in many functional forms - monetary, productive, commodity.
The circulation of enterprise funds can only take place if there is a certain advance value in cash. This value in cash is the working capital of the enterprise.
Thus, working capital is the amount of funds necessary and sufficient for the normal organization of production.
Working capital performs two functions: production and settlement. Carrying out production function, working capital, advancing into working capital production assets, maintain continuity of the production process and transfer their value to the produced product. Upon completion of production, working capital passes into the sphere of circulation in the form of circulation funds, where they perform a settlement function, transforming working capital from a commodity form into money.
According to the degree of planning, working capital is divided into standardized and non-standardized. Standardized working capital includes funds that are used to create the necessary production reserves of raw materials, materials, containers, and work in progress. Non-standardized funds include funds in goods shipped, cash and funds in settlements. Financial management: theory and practice: textbook / ed. E.S. Stoyanova. - 6th ed. - M.: Perspective, 2006. - 656 p.
An important indicator of the structure of working capital is the ratio between funds invested in the sphere of production and in the sphere of circulation. The correct distribution of the total amount of working capital between the sphere of production and the sphere of circulation largely determines their normal functioning, the speed of turnover and the completeness of the performance of their inherent functions: production and payment and settlement.
According to the period of functioning of working capital, we will highlight:
1. The constant part of working capital, that is, the part for which the organization constantly needs in the same volume, any fluctuations in the form of seasonality, etc.
2. The variable part of working capital, that is, that additional part of it that is formed due to seasonality, attracting third-party orders, etc.
The composition and structure of working capital can be presented in the following table:
Rice. 1. Structure of working capital
In the process of rationing working capital, norms and standards are developed. The working capital norm is a relative value corresponding to the cost of the minimum, economically justified volume of inventories of inventory assets, established, as a rule, in days.
The working capital ratio is the minimum required amount of funds to ensure the business activities of the enterprise. Working capital standards are determined taking into account the need for funds, both for carrying out the main activities of the enterprise and for conducting auxiliary and service activities.
The efficiency of using working capital is determined by a number of indicators, the main one of which is the turnover of working capital.
The turnover of working capital considers the duration of one complete circulation of funds from the moment of transformation of working capital in cash into production inventories and until the release of finished products and their sale Holt R.N. Fundamentals of financial management: trans. from English - M.: Delo, 2007. - 207 p. .
The duration of one revolution in days implies the duration of the production cycle and the amount of time spent on selling finished products.
The basis for determining the need for working capital is the cost estimate for the production of products (works, services) for the planned period.
A general indicator of the efficiency of using working capital is the profitability indicator, which is calculated as the ratio of profit from sales of products to the average amount of working capital.
The profitability indicator characterizes the amount of profit received for each ruble of working capital and reflects the financial efficiency of the enterprise.
Sources of financing for working capital are: equity capital, long-term and short-term liabilities and accounts payable.
Sources of working capital formation have a significant impact on the efficiency and rationality of the use of working capital. An excess of working capital indicates that part of the enterprise’s capital does not work and does not generate income; on the other hand, a lack of working capital slows down the production process and the speed of economic turnover of its funds. In general, own working capital indicates the degree of financial stability of the enterprise, its position on financial market. The leading role in the composition of sources of formation belongs to own working capital. They must ensure the property and operational independence of the organization, which is necessary for the profitability of business activities Basovsky L.E. Theory of economic analysis. Tutorial. M., Infra-M., 2008.
1.2 Methods of working capital management
Working capital management is the most extensive part of financial management in the entire system of managing the use of enterprise capital. This is due to the existence of a large number of asset elements, formed through working capital, required by the individualization of management. The importance is also manifested by the high dynamics of transformation of types of working capital; high role in ensuring solvency, profitability and other target results financial activities enterprises. The target setting of the working capital management policy is to determine the volume and structure of current assets, sources of their coverage and the ratio between them sufficient to ensure long-term production and efficient financial activity of the enterprise. The relationship between these factors and performance indicators is quite obvious. Chronic failure to fulfill obligations to creditors can lead to a severance of economic ties with all the ensuing consequences.
The formulated target is of a strategic nature; no less important is maintaining working capital in an amount that optimizes the management of current activities. From the perspective of daily activities, the most important financial and economic characteristic of an enterprise is its liquidity, i.e. ability to repay short-term accounts payable on time. For any enterprise, an adequate level of liquidity is one of the most important characteristics of the stability of economic activity. Loss of liquidity is fraught not only with additional costs, but also with periodic stoppages of the production process.
If cash, accounts receivable, and inventories are maintained at relatively low levels, the likelihood of insolvency or insufficient funds to operate profitably is high. As the amount of net working capital increases, liquidity risk decreases. Of course, the relationship is more complex, since not all current assets have an equally positive effect on the level of liquidity.
However, one can formulate simplest option working capital management, minimizing the risk of loss of liquidity: the greater the excess of current assets over current liabilities, the lower the degree of risk; thus, one must strive to increase net working capital.
Thus, the working capital management policy must ensure a compromise between the risk of loss of liquidity and operational efficiency. This comes down to solving two important problems:
1) ensuring solvency. There is no such condition if the company is unable to pay bills, fulfill obligations and, possibly, declares bankruptcy. An enterprise that does not have sufficient levels of working capital may face the risk of insolvency;
2) ensuring an acceptable volume, structure and profitability of assets. Different levels of different current assets are known to have different effects on earnings. The presence of a commercial organization's own working capital, its composition and structure, turnover rate and efficiency of use of working capital largely determine the financial condition of the enterprise and the stability of its position in the financial market, the main indicators of which are:
Solvency, i.e. the ability to repay your debt obligations on time;
Liquidity - the ability to make necessary expenses at any time;
Opportunities for further mobilization of financial resources.
Effective use of working capital plays a big role in ensuring the normalization of the enterprise, increasing the level of profitability of production and depends on many factors. In modern conditions, huge Negative influence factors of the crisis state of the economy affect the efficiency of using working capital and slowing down their turnover. Sharanova N., Sharypova N. How to normalize a company’s current assets // Financial Director. - 2006. - No. 2. - pp. 24-29:
Decrease in production volumes and consumer demand;
High inflation rates;
Severance of economic ties;
Violation of contractual and payment discipline;
High level of tax burden;
Reduced access to credit due to high bank interest rates.
All of these factors influence the use of working capital, regardless of the interests of the enterprise.
There is a specially developed list of working capital management stages.
First of all (stage 1), it is necessary to analyze the use of working capital in the operating process of the enterprise in the previous period. To do this, we consider the dynamics of the total volume of working capital, the dynamics of the composition of the enterprise’s current assets formed at the expense of working capital. Analysis of the composition of an enterprise's current assets by individual types allows us to assess the level of their liquidity.
The results make it possible to determine the overall level of efficiency of working capital management of the enterprise and identify the main directions for its increase in the coming period.
At the next, stage 2, the fundamental approaches to the formation of current assets at the expense of the operating capital of the enterprise are determined.
All working capital requirements are covered only by equity capital and long-term liabilities. An enterprise can pursue a conservative policy in two cases: either if it is necessary to save all types of resources to maintain and strengthen the financial position of the enterprise; or in conditions of complete certainty in capital markets, capital markets and goods markets.
At stage 3, the volume of working capital is optimized. Such optimization should proceed from the chosen type of policy for the formation of current assets, ensuring a given level of efficiency and risk ratio of the use of working capital.
Optimization of the ratio of the constant and variable parts of working capital used in the operating process refers to stage 4. This is the basis for managing its turnover during use.
At the next, 5th stage, the necessary liquidity of the assets used, formed at the expense of working capital, is ensured.
At the final stage, an increase in the profitability of working capital is ensured. Its size should generate a certain profit when it is used in production and marketing activities.
Taking into account the main purpose of using working capital in the process of carrying out activities, an appropriate financial policy is formed.
The following main methods for determining the optimal need for working capital are identified: Savitskaya G.V. Methodology for comprehensive analysis of economic activity. - M.: Infra-M, 2007. - 378 p. :
Analytical method;
Coefficient method;
Direct counting method.
The analytical method involves determining the need for working capital in the amount of their average actual balances, taking into account the growth of production volumes.
In order not to record the shortcomings of previous periods in the organization of working capital, it is necessary to analyze the actual balances of production inventories in order to identify unnecessary, redundant, illiquid, as well as all stages of work in progress to identify reserves for reducing the duration of the production cycle, study the reasons for the accumulation of finished products in the warehouse and determine the actual need for working capital. In this case, it is necessary to take into account the specific operating conditions of the enterprise in the previous year (for example, price changes).
With the coefficient method, inventories and costs are divided into those that directly depend on changes in production volumes (raw materials, materials, costs of work in progress, finished goods in the warehouse) and those that do not depend on it (inventories, deferred expenses). For the first group, the need for working capital is determined based on the size in the base year and the growth rate of production in the coming year.
If an enterprise analyzes the turnover of working capital and seeks opportunities to accelerate it, then the real acceleration of turnover in the planned year must be taken into account when determining the need for working capital. For the second group of working capital, which does not have a proportional dependence on the growth of production volumes, the need is planned at the level of their average actual balances for a number of years.
If necessary, you can use analytical and coefficient methods in combination. First, using an analytical method, determine the need for working capital, depending on the volume of production, and then, using the coefficient method, take into account changes in production volume.
The direct counting method is the most accurate and reasonable, but at the same time quite labor-intensive.
It 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 requires highly qualified economists and the involvement of employees of many enterprise services (supply, legal, product sales, production department, accounting, etc.) in standardization. But this allows you to most accurately calculate the company’s need for working capital.
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 private and aggregate standards.
The efficiency of using working capital is characterized by its turnover and profitability indicators. Therefore, management efficiency can be achieved by reducing the turnover period and increasing profitability by reducing costs and increasing revenue. Acceleration of turnover of working capital does not require capital costs and leads to an increase in production volumes and sales of products. However, inflation quickly depreciates working capital; enterprises use an increasing portion of them to purchase raw materials and fuel and energy resources; non-payments from buyers divert a significant portion of funds from turnover. Financial management (Enterprise finance): textbook / A.A. Volodin et al. - M.: INFRA-M, 2006. - 504 p.
The economic, organizational and production results from storing a certain type of current assets in one volume or another are specific to this type of asset. A large stock of finished products, on the one hand, reduces the possibility of a shortage of products in the event of unexpectedly high demand, on the other hand, it does not allow for economical management of production. Increasing working capital turnover comes down to identifying the results and costs associated with storing inventories and striking a reasonable balance between inventories and costs. To accelerate the turnover of working capital at an enterprise, it is advisable to A.V. Kondrasheva. Enterprise finance in questions and answers, - M.: Liga, 2009. :
Planning the purchase of necessary materials;
Introduction of rigid production systems;
Use of modern warehouses;
Improving demand forecasting;
Fast delivery of raw materials and supplies.
The second way to accelerate working capital turnover is to reduce accounts receivable. The level of accounts receivable is determined by many factors: the type of product, market capacity, the degree of market saturation with this product, the settlement system adopted by the enterprise, etc. Accounts receivable management involves, first of all, control over the turnover of funds in settlements. The acceleration of turnover in dynamics is considered as a positive trend. The selection of potential buyers and the determination of the terms of payment for goods provided for in contracts are of great importance.
The selection is carried out using formal criteria: compliance with payment discipline in the past, the buyer’s forecast financial capabilities to pay for the volume of goods requested by him, the level of current solvency, the level of financial stability, the economic and financial conditions of the seller’s enterprise (overstocking, degree of need for cash, etc. .).
The third way to reduce working capital costs is to make better use of cash. From the perspective of investment theory, cash represents one of the special cases of investing in inventory.
So, to ensure solvency, profitability and other target results of the enterprise’s financial activities, it is necessary to improve the process of working capital management. The use of working capital management methods in the financial management system occupies an important place among the measures aimed at improving the operation of the enterprise and strengthening its financial discipline.
Chapter 2. Working capital management using the example of the company "ROZMYSL" LLC
2.1 Brief economic characteristics of the company ROZMYSL LLC
The company is registered by Order of the Head of the Administration of the Penza District of the Penza Region dated December 29, 2004 No. 1277.
Complete brand name Company: Limited Liability Company "Rozmysl". Abbreviated corporate name of the company: Rozmysl LLC.
Location of the company: 440060, Penza, Stroiteley street, 1
The goal of society is to make profit.
The Company carries out the following main activities:
· production of civil works,
· excavation work,
· construction of foundations and drilling of water wells,
· installation of buildings and structures from prefabricated structures,
· organization of cargo transportation,
· production of sanitary and technical works,
The governing bodies of the company are:
· general meeting founders
· sole executive body (general director).
The average number of employees is 48 people.
Rozmysl LLC is a construction organization.
In its activities, Rozmysl LLC is guided by the constituent documents, the current legislation of the Russian Federation, Decrees of the President of the Russian Federation, Decrees of the Government of the Russian Federation, Decrees of the Ministry of Labor of Russia and legislative acts of local authorities, all normative technical documentation necessary for economic activities.
The organization is headed by a general director.
The main task of the organization is to ensure effective interaction between structural divisions in order to direct their activities to improve the quality and competitiveness of the products and services produced and increase the organization’s profits.
The economic characteristics of the organization can be compiled on the basis of the financial statements: balance sheet and profit and loss statement of Rozmysl LLC for 2008-2010.
Table 2 Analysis of the structure and dynamics of the main financial indicators, thousand rubles.
Fig.3 Dynamics of main financial results
The diagram in Fig. 3 clearly shows the constant growth in sales volume, fluctuations in cost practically did not have a strong impact on marginal income, the organization carries out its economic activity no losses, but net profit decreased in 2010.
As a result of the analysis of the main indicators, it is obvious that the determining factor for the formation of profit for the reporting year is not only profit from sales, but also the operating and non-operating activities of the organization.
Low figures in 2008 are associated with the general financial crisis, in 2009, the organization, as a result of implementing anti-crisis measures, significantly reduced costs and increased revenue, but it was not possible to contain the increase in costs.
In 2010, prices for petroleum products increased and wage and its taxation, the organization increased borrowing.
Return on sales is an indicator of an organization's pricing policy and its ability to control costs. The growth rate of sales profitability has decreased compared to 2009, but profitability remains at a fairly high level of 24%.
Profitability of production is calculated as the ratio of profit from sales to the amount of costs for production and sales of products and shows how many rubles of profit the enterprise has for each ruble spent on production and sales of products.
A decrease in profit indicates losses from operating activities; one of the ways to reduce losses from operating activities can be a mechanism for determining the optimal cash component in the overall financial flows of the enterprise, which allows the most efficient management of the assets of the enterprise.
Let's conduct a general analysis of the organization's financial condition based on an express analysis of the organization's balance sheet (Appendices 3 and 4).
Table 3 Dynamics and structure of property of Rozmysl LLC, thousand rubles.
|
Balance sheet asset |
Absolute value |
Specific gravity, % |
Change 2010 to 2009 |
||||||
|
growth % |
|||||||||
|
Basic |
|||||||||
|
Construction in progress |
|||||||||
|
Inventories including raw materials and materials |
|||||||||
|
Unfinished production |
|||||||||
|
Accounts receivable |
|||||||||
|
Cash |
|||||||||
As a result of the horizontal analysis of the balance sheet asset, we can say that:
1. During the analyzed period, fixed assets increased, which is a positive moment when assessing the financial condition.
A garage building was put into operation, which made it possible to repair equipment on our own.
2. The increase in inventories could be partly due to an increase in metal prices, but it is necessary to check this indicator, since it has a strong impact on the amount of working capital.
3. An increase in accounts receivable by more than 2 times indicates a lack of credit policy; it is necessary to check contracts, since orders budgetary institutions are paid after the objects are delivered and if all orders are like this, then receivables are not a concern.
A positive aspect is the reduction of work in progress and an increase in liquid assets.
Vertical analysis showed that production is material-intensive and requires special attentive attitude to inventory planning.
Table 4 Dynamics and structure of sources of financing for Rozmysl LLC, thousand rubles.
|
Liability balance |
Absolute value |
Specific gravity, % |
Changes |
||||||
|
absolute. magnitude |
growth % |
||||||||
|
Authorized capital |
|||||||||
|
Reserve capital |
|||||||||
|
retained earnings |
|||||||||
|
long term duties |
|||||||||
|
Short-term liabilities |
|||||||||
|
Loans and credits |
|||||||||
|
Accounts payable |
|||||||||
|
Suppliers |
|||||||||
|
Debt to staff |
|||||||||
|
Debt to extra-budgetary funds |
|||||||||
|
Debt on taxes and fees |
|||||||||
|
Other KOs |
|||||||||
Analysis of the balance sheet liabilities showed the insufficiency of the organization's funds to finance its activities, despite the growth in profits.
The founders decided to increase authorized capital due to additional contributions, but these funds were not enough, the organization was forced to turn to a loan.
Short-term loans increased by 59%.
Accounts payable are decreasing, but continue to remain high; the organization, having not received payment for commissioned objects, does not have the funds to pay suppliers.
The structure is dominated by borrowed funds, but in 2010. due to high profits and increased authorized capital, own funds increased and amounted to 48.3%.
Based on the analysis of the balance sheet, we can conclude that the organization is operating quite effectively, however, the most liquid assets: cash and short-term financial investments are significantly less than accounts payable and other short-term liabilities, this indicates the low solvency of the enterprise.
The analysis revealed a problem - these are receivables and payables, let's look at their dynamics and ratio, Table 5
Table 5 Dynamics of receivables and payables, thousand rubles.
Rice. 4 Dynamics of receivables and payables
Table results 5 showed that Rozmysl LLC, despite the absence of a credit policy, controls receivables and payables and their ratio tends to the boundary standard, which is equal to 1.
It should be noted that the coefficients that depend on the organization’s own funds lag behind the normative ones.
Own funds are one of the main sources of financing working capital.
2.2 Analysis of the efficiency of working capital management of the company
As practice shows, development only at the expense of one’s own resources (that is, by reinvesting profits in the company) reduces some financial risks in business, but at the same time greatly reduces the rate of revenue growth. On the contrary, attracting additional debt capital with the right financial strategy and quality financial management can dramatically increase income. The reason is that an increase in financial resources, with proper management, leads to a proportional increase in sales and often net profit.
To analyze the effectiveness of working capital management, we will consider the structure and determine the cost of working capital of Rozmysl LLC.
Table 10 Structure of working capital, 2010
In 2010, the organization's equity capital increased significantly due to an increase in profits and authorized capital.
Let's calculate the weighted average cost of working capital (WCA):
Fig.5 Structure of working capital, 2009
Fig.6 Structure of working capital, 2010
SSOC 2010 = CSK* dsk + TsZK * dzk + TsKZ* dkz =
15623*0,395 + 10327*0,342 + 6315*0,263 = 6171+3532 + 1661 = 11364
SSOC 2009 = 7903*0.395+7827*0.246+2200*0.0957+9319*0.2627 = 13598
where TsSK is the price of own sources invested in working capital;
CZK - the price of borrowed sources financing working capital;
CDC - the price of accounts payable and other sources of working capital financing;
dск, dзк, dкз - the share of these sources in the structure of working capital.
The structure of working capital in 2010 improved compared to 2010, since the weighted average cost of total capital is less, which means that the costs of attracting financial resources will be minimal and profits will be greater.
Let's calculate the optimal ratio of debt and equity capital according to the effect criterion financial leverage.
This effect is to increase the return on equity while increasing the share of borrowed capital in its total amount to certain limits. The maximum share of borrowed capital that ensures the maximum level of financial leverage effect will characterize the optimization of the structure of capital used according to this criterion.
Table 11 Calculation of the level of return on equity at various values of the financial leverage ratio /
|
Indicators |
Calculation option |
|||||||
|
1. Own capital, thousand rubles. |
||||||||
|
2. Borrowed capital, thousand rubles. |
||||||||
|
3. Total capital, thousand rubles. |
||||||||
|
4. Financial leverage ratio |
||||||||
|
5. Profit from sales, thousand rubles. |
||||||||
|
6. Return on assets,% |
||||||||
|
7. Interest rate per loan |
||||||||
|
8. Amount of interest on loan, line 2*line 7/100 |
||||||||
|
9. Profit before tax, thousand rubles. |
||||||||
|
10. Income tax rate |
||||||||
|
11. Amount of income tax, line 10*line 9/100 |
||||||||
|
12. Net profit p.9-p.11 |
||||||||
|
13. Return on equity |
As the above data show, the highest level of profitability under given conditions is achieved with a financial leverage ratio of 0.14. When the latter increases, the interest rate for the loan increases, as a result of which the return on equity decreases.
Financial leverage in 2010 at Rozmysl LLC was equal to 0.46; with existing assets and sales profits, the organization incurs losses from lending, return on equity is 14%.
The loss comes from the increase in interest on loans.
At the same time, the organization’s profit decreases, in 2010. the total amount of net profit increased only due to other income. If we look at the structure of profit before tax, it is obvious that interest significantly reduces profit.
To determine the efficiency of the use of working capital in Rozmysl LLC, we will conduct a factor analysis of the turnover of working capital in the organization (Table 12).
Table 12 Analysis of working capital turnover
|
Indicators |
Deviation |
Deviation |
||||
|
1. GRP, thousand rubles. |
||||||
|
2. Number of days, analysis period |
||||||
|
3. One-day revenue, thousand rubles. (page 1/page 2) |
||||||
|
4. Cost of working capital (result of section 2 of the balance sheet) |
||||||
|
5. Turnover ratio of current assets, in revolutions (page 1 / page 4) |
||||||
|
6. Duration of one turnover of all current assets, days ((page 4 / page 1) * page 2) |
||||||
|
7. Working capital load factor of 1 rub. sales revenue (page 4 / page 1) |
1. Impact of changes in GRP
To = 21507/60.3-373= - 16.3 days
2. Impact of changes in the cost of working capital
Until = + 5659 / 60.3 = + 93.8 days
3. General influence of factors: 77.5 days.
An increase in the turnover period of working capital is accompanied by the diversion of funds from economic circulation and their “death” in inventories and work in progress. As a result, the organization is forced to additionally attract funds into circulation.
The amount of involvement of additional working capital as a result of a slowdown in working capital turnover
OS = 77.5* 57.6= 4464 thousand rubles.
One of the main indicators characterizing the degree of intensity of working capital use is the financial cycle. This indicator allows us to judge how long it takes for working capital to pass through all stages of circulation in a given organization.
The financial cycle, or cash circulation cycle, is the time during which funds are withdrawn from circulation. It is equal to the sum of the circulation time of inventories and costs and the circulation time of receivables. Since the organization pays bills with a time delay, the financial cycle is reduced by the time the accounts payable are processed.
The shorter the financial cycle, the more efficiently the organization operates. A negative financial cycle value indicates that the organization is experiencing insufficient funds, which is associated with low accounts receivable turnover.
The duration of the financial cycle (FCC) in days of turnover is determined by the equation:
where POC is the duration of the operating cycle;
VOK - time of circulation of accounts payable;
WHO - time of circulation of inventories;
BOD - receivables circulation time
where T is the length of the period (usually a year, i.e. T=365);
SPZ - average production reserves;
СДЗ - average accounts receivable;
SKZ - average accounts payable;
ZPP - production costs;
VRK - proceeds from sales on credit.
Analysis of the effectiveness of working capital management at Rozmysl LLC made it possible to identify problems arising in the organization of working capital management.
capital turnover management
Chapter 3. Problems and ways to improve working capital management of the company "ROZMYSL" LLC
3.1 Problems of working capital management in ROZMYSL LLC
Effective working capital management plays a big role in ensuring the normalization of the organization’s work; the most important problem of working capital management in Rozmysl LLC is the lack of a documented management process.
The presence of an organization’s own working capital, its composition and structure, turnover rate and efficiency of use largely determine the financial condition of an economic entity and the stability of its position in the financial market, namely:
· solvency, i.e. the ability to repay one’s debt obligations on time;
liquidity - the ability to make necessary expenses at any time;
· opportunities for further mobilization of financial resources.
At Rozmysl LLC, due to poor working capital management, overdue receivables in the amount of 400 thousand rubles arose.
Circumstances such as the absence of a financial manager and poor working capital management can lead to a loss of liquidity for the organization.
The organization lacks a clear approach that clearly describes priorities between various factors, which have an impact on working capital, the management of Rozmysl LLC has no idea what to pay attention to first, why, and what can be counted on.
There is a need for new systematic approaches to working capital management. One of them is the introduction of an effective credit policy that will help minimize doubtful and bad debts, ensure the required rate of receivables turnover, and achieve the goal for sales revenue and net profit.
The lack of analysis of working capital and control over the ratio of debt and equity capital led Rozmysl LLC to a loss of profitability and a decrease in profits, which affected the decrease in the financial stability of the enterprise.
An uncontrolled decline in the solvency and financial stability of an enterprise can lead to bankruptcy, therefore, forecasting indicators of solvency and financial stability must be carried out.
The state of the organization's working capital, its distribution and use, guarantees and ensures the development of the organization based on the growth of profits and capital while maintaining solvency and creditworthiness under an acceptable level of risk.
When determining the optimal amount of working capital, it is necessary to optimize working capital. The total amount of its own working capital is established by the organization 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.
At Rozmysl LLC, stock rationing is carried out exactly according to construction standards, and estimators, fearing insufficient stocks, do not optimize purchases, stocking them to the maximum, which results in the formation of illiquid stocks.
The economic activity of the enterprise is seasonal; when planning inventories, seasonality is not taken into account, which also leads to an increase in inventories in the warehouse.
Purchasing materials at once for the entire order, which has a large operating cycle, reduces inventory and cash turnover.
Lack of control over the turnover of working capital increases the risks associated with excess working capital:
· stocks may deteriorate physically or become obsolete;
· costs for storing excess inventory increase;
· debtors may refuse to pay or go bankrupt;
· property tax increases;
· Inflation significantly reduces the real value of accounts receivable and cash.
Consequently, the problem of optimizing working capital is one of the most important, the solution of which determines the level of liquidity of the organization.
During the planning process, Rozmysl LLC does not analyze alternative options for sources of financing; financing is carried out without considering options.
During the year, the enterprise's need for working capital may change, so it is not advisable to fully generate working capital from its own sources. This leads to the formation of surplus working capital at certain moments and weakening incentives for their economical use. In this case, borrowed funds are used to finance working capital.
Additional need for working capital due to temporary needs is also provided by short-term bank loans. Attracted and borrowed funds stimulate the desire for effective use working capital.
Thus, as a result of the analysis of the working capital management system at Rozmysl LLC, the following main problems were identified:
· lack of credit policy;
· lack of analysis of working capital and sources of financing;
· lack of control over the use of working capital.
To solve these problems, measures were developed to improve the working capital management of Rozmysl LLC.
3.2 Measures to improve working capital management of Rozmysl LLC
In modern business conditions, working capital management is one of the ways to increase the profitability of sales and one of the elements of reducing costs.
Similar documents
Determination of the essence, study of the structure and study of the methodological foundations of managing working capital of an enterprise. Comprehensive analysis of the working capital management process of OJSC "ATZ". Measures to improve the efficiency of working capital management.
course work, added 11/05/2011
Concept and classification of working capital of an enterprise, sources of their financing. Analysis of the working capital management system of the Vologda Bread Products Plant OJSC. Analysis of cash flows and receivables of the enterprise.
course work, added 03/08/2015
Organizational and economic characteristics and legal structure of LLC "YugProfKomplekt". Financial performance indicators of the enterprise. Working capital management methods. Analysis and assessment of the dynamics of fixed assets. Optimization of accounts receivable.
thesis, added 04/21/2016
The essence and structure of working capital. Contents and basic methods of the working capital management process. Analysis of the efficiency of working capital management in Bashkirgaz LLC. Recommendations for improving working capital management.
thesis, added 10/07/2012
The essence of working capital, their composition and structure, sources of formation. Analysis of working capital management using the example of the Federal State Unitary Enterprise "OMO named after Baranov", a brief description of the enterprise, analysis of working capital turnover and financial stability.
thesis, added 01/24/2010
Basic methods of working capital management using the example of OAO Orenburgneft. Organizational and economic characteristics of the enterprise, analysis of the composition and structure of current assets. Rationing of inventories and working capital in a market economy.
course work, added 12/17/2012
Management of a company's net working capital using the example of oil and food industry enterprises. The share of accounts receivable in current assets, accounts payable in short-term liabilities. Net cash flow analysis.
test, added 04/20/2015
Concept, composition, structure and classification of working capital. Sources of formation of working capital. System of indicators for assessing working capital and the efficiency of their use. Management of working capital and current financial needs.
course work, added 06/24/2009
Structure of assets and liabilities of OJSC "Kyshtym Radio Plant". Analysis and assessment of fixed assets (fixed assets) of the enterprise and the sources of their formation. Comparative analysis accounts receivable and accounts payable. Measures to improve the financial condition of the plant.
presentation, added 02/11/2011
The concept and types of working capital, sources of their formation. Analysis of turnover ratios and consolidation of funds, profitability, liquidity of the enterprise. Calculation of operating and financial cycles. Selecting a working capital management policy.