1. Concept, composition and structure of current assets.
2. Circuit and working capital turnover.
3. Methods of assessing the individual elements of working capital.
4. Valuation of working capital (defined needs for working capital).
1. Concept, composition and structure of current assets.
Working capital is called constantly being in motion a set of productive assets and working capital fund appeal.This means that the current assets are meant to serve as the sphere of production and the sphere of circulation.
Circulating productive assets – is the subject of labor, which is completely consumed during one production cycle and fully transfer their value to the finished product.
Treatment funds are meant to serve the process of selling products and include:
- Finished products;
- Cash;
- Means in the calculations.
By its very nature, economic working capital represents cash invested (advances) in current operating assets and circulating assets.
The main purpose of working capital – is to ensure the continuity and rhythm of production.
Structure of working capital is characterized by a specific gravity of the individual elements of working capital in the general population and is expressed as a percentage.
2. Circuit and working capital turnover.
By the nature of participation in trade and production operations of the enterprise current operating assets and funds of the treatment are closely interrelated and constantly move from the sphere of production in the sphere of circulation and vice versa.
The scheme of the circuit:
D (money) – T (good) – … – P (made in) – … – `T (new product) – - D` (new money) -
MPZ – inventories
NP – work in progress
GP – Finished Products
D `- revenues from sales
Then the cycle repeats itself and thus creates the necessary conditions to ensure the continuity of production.
To assess the effectiveness of working capital is used the following indicators:
1. Turnover Ratio:
Q – volume of output;
OS – the average size of current assets (calculated on average chronological).
This ratio shows the number of revolutions of the working capital during the reporting period.
Turnover ratio can be calculated as for the whole population of working capital and for individual items of working capital.
The value of turnover rate depends on the duration of the period. If the company is stable, then the value of the OS from month to month will be the same as Q increases with increasing period.
2. Coefficient of securing working capital:
Shows how much working capital is used to produce 1 rub. products.
3. The duration of one revolution:
M – the duration of the period (30, 90, 360 days).
Duration of traffic can be compared regardless of the value of the billing period.
Accelerating the turnover amounts to an additional involvement of cash into the economy.
The shorter one turnover (more speed), at the same volume of production, the less the working capital required enterprise.
Accompanied by slowing the turnover of the diversion of funds from economic circulation and their relatively longer necrosis in industrial stocks, work in process and finished goods.
3. Methods of assessing the individual elements of working capital.
On admission to the enterprise inventories are recorded at actual cost. Actual cost consists of costs for the acquisition of material resources and includes the cost of these resources, surcharges and commission fees paid in supply organizations, customs duties, transportation costs, storage and delivery performed by third parties.
The cost of consumption in the process of production of material resources and the cost of inventories at the end of the period defined in the following ways:
1) at a cost of each unit of stock (for unique materials);
2) at average cost
3) at a cost of first-time purchases FIFO
4) at a cost most recent purchases LIFO
With rising prices FIFO method shows the greatest amount of profit, and LIFO – the smallest. Method for estimating an average cost includes all prices of resources and greatly smooths their swings.
4. Valuation of current assets.
Valuation of current assets – is the process of developing sound rules and regulations, ie determination of estimated values of the working capital needed to build a permanent minimum reserves sufficient for the smooth operation of the enterprise.
