When organizing any business, working capital is an integral part of creating its profitability. Working capital is primarily a short-term working asset. That is, it is not in the same condition for a long-term period, as, for example, equipment that is a non-current long-term asset (purchased, installed and introduced, until complete wear and tear).
Working capital is the assets of a business that turn around ("came"-"left") for a relatively short period of time and contribute to the receipt of revenue (income) from their work (turnover).
For example, an entrepreneur, having organized his business, in order to receive income (revenue) from it, must invest. What exactly? And this is in the infrastructure where it will carry out its trading activities (non-current capital) and in the very working capital that is being discussed. If he sells, for example, shoes, then he must buy shoes. If furniture, then furniture, etc.
In all this, the time interval is of key importance. That is, how much he needs to buy for uninterrupted trading for a certain period of time. You can fill up the warehouse so that the next purchase can be made only in a year, or you can carry them out every week, having a high turnover of your products.
For manufacturing organizations, working capital is a more extended concept that includes not only a warehouse of finished products. The company is not only engaged in resale – it produces. Therefore, in order to sell to him and receive income (revenue), it is necessary:
- purchase raw materials (raw materials warehouse)
- ensure its processing and finding the costs of some time in the production process (work in progress - WIP)
- and then to provide a warehouse of finished products (goods for sale)
- and if the sale will be carried out with a deferred payment, then also provide accounts receivable (DZ)
All these are the main current assets of the enterprise or, in another way, the constituent elements of working capital.
As mentioned above, time plays a key role in the effective management of working capital.
Let's take an example of such a circulating asset as raw materials and try to understand what is the relevance of the issue of accounting and planning of these assets in the organization's economy.
It is known that the company wrote off raw materials to the cost price (spent on production) for 3 months 1 200 rubles. (that is, they were transferred to another form of asset).
To begin with, let's determine how much raw materials the company consumes per day:
1 200/(3 monthsx 30 days) = 13 rubles.
Now let's determine its average monthly stock balance based on the above data:
(100 + 120 + 93 + 107)/4 = 105 rub .
That is, the company spends 13 rubles of raw materials per day, and on average its daily balance in the warehouse is 105 rubles.
Let's determine how many days on average the current balance of raw materials can last:
105/13 =8 days (stock rate)
And so, on average, the raw materials warehouse is provided for 8 days of work. At the same time, the turnover of this type of asset is:
30 days/8 days = 3.8 times a month
In other words, this means that the organization replenishes the raw materials warehouse about 4 times a month (makes a transport turnover).Is it a lot or a little – 8 days for a raw stock?
Usually, when planning this period, they proceed from a period that will ensure the smooth operation of production. It includes the term of transportation of raw materials from the supplier to its warehouse + an insurance production stock (in case there are any failures with delivery or production).
For each production, depending on its specifics, the remoteness of suppliers, this period may be different.
From the specified calculation algorithm, the relationship is visible stock rates with the value of the stock balance. The higher the stock rate, the lower the turnover and the larger its balance.
A similar algorithm is used when calculating the stock and turnover rates of other types of working capital (work in progress, finished products, accounts receivable).
In case of a decrease in the turnover (liquidity) of such assets, there will be an increase in working capital (its increase to the balances of the previous period), which must be financed, if not with own funds, then with borrowed funds.
If an enterprise can reduce the reserve rate (in days) for a current asset, then this can directly affect the decrease in the amount of their balances, and therefore lead to a decrease in the need for money to finance them.
As everyone understands, for example, when an organization does not have its own money and it needs to contact a bank to buy an additional volume of raw materials, then this issue becomes even more economically relevant, since in this case there are additional costs for paying bank costs (percent).
If, in order to reduce the warehouse norms of raw materials, an increase in the efficiency of activities is directly related to the search for more "close" suppliers and reasonable purchases for production, then for the norms of work-in-progress, this is the optimization of the production cycle (for more rapid transfer of products to the warehouse).
For a finished product warehouse, optimization is associated with faster shipment of finished products, and for accounts receivable, this is a reduction in the period of deferral provided to the buyer.
Therefore, proper planning of working capital and effective management of them can provide a significant increase in the profit of the organization in the condition of limited own funds in their work.
What is the working capital of an enterprise - in simple about complex - Something like that!
