Working capital is a set of funds advanced into working capital production funds and into circulation funds.
Circulating production assets are a part of the enterprise’s funds, which is completely consumed during one production cycle, loses its natural form and completely transfers its value to the cost of finished products. Unlike fixed assets, which repeatedly participate in the production process, working capital functions only in one production cycle and completely transfer its value to the finished product. They are the material basis of production, provide the process of production, the formation of value.
The classification of working capital of the enterprise is presented in Figure 3.1.
According to their functional purpose, circulating production assets are divided into production stocks and unfinished products. The composition of production stocks includes raw materials, basic and auxiliary materials, purchased components and semi-finished products, fuel, containers, spare parts for the repair of fixed assets, low-value and fast-wearing items. Unfinished products include: work in progress, semi-finished products of own manufacture and expenses of future periods. All these are material carriers of production circulating assets. Their only intangible element is the costs of future periods necessary to create production reserves for the development of new products, new technology, that is, the costs that are made in a given year, but are related to the cost of production of the next year.
Another component of working capital is the circulation funds.
It is not directly involved in the production process. Their purpose is to ensure the process of circulation, in servicing the circulation of funds of the enterprise. Circulation funds include finished products in the warehouse of the enterprise, goods shipped, but not paid (receivables), funds in unfinished settlements and cash in banks and cash registers of the enterprise. Working capital (working capital) ensures the continuity of the process of reproduction, the constant renewal of its material basis – objects of labor and low-value and rapidly wearing out means of labor.
The circulation of funds of enterprises begins with the advance payment of value in monetary form (D) for the purchase of raw materials, materials, fuel and other means of production (T) – the first stage of circulation:
D – T…
As a result, cash takes the form of production stocks, expressing the transition from the sphere of circulation to the sphere of production. The cost is not spent, but is advanced, since after the completion of the cycle, it is returned.
The second stage of the circulation is performed in the process of production (P), where the labor force carries out the productive consumption of the means of production, creating a new product (Tn), which carries the transferred and newly created value. The advance value again changes its form – from productive it passes into commodity:
T – P – Tn …
The third stage of the circulation is the sale of manufactured finished products (works, services) and the receipt of funds. At this stage, working capital again moves from the sphere of production to the sphere of circulation. Interrupted commodity circulation is resumed, and the value from the commodity form passes into the monetary (Dn):
Tn – Dn.
The difference between the amount of money spent on the manufacture and sale of products (works, services) and received from the sale of manufactured products (works, services) is the monetary savings of the enterprise.
Having completed one cycle, working capital enters a new one, thereby their continuous turnover is carried out:
D – T – P – Tn – Dn.
It is the constant movement of working capital that is the basis of an uninterrupted process of production and circulation. Analysis of the circulation of funds of enterprises shows that the advance value not only consistently takes various forms, but also constantly in certain sizes is in these forms. In other words, the advanced value at each given moment of circulation in various parts is simultaneously in monetary, productive, commodity forms. The circulation of funds of enterprises can be made only if there is a certain advance value in cash. Entering the cycle, it no longer leaves it, consistently changing its functional forms. The specified value in monetary form represents the working capital of the enterprise.
Working capital function simultaneously in all stages, ensuring the continuity of the production process. Thus, working capital performs its most important function – production: monetary support for the continuity of the production process. At the same time, working capital performs another equally important function of payment and settlement. The performance of this function depends on the availability of working capital necessary to carry out the process of selling finished products and completing the calculations. For the normal production and commercial activities of the enterprise, the availability of working capital in the minimum required amounts is required not only to advance them into the production sphere, but also into the sphere of circulation. Proper organization, safety and efficiency of the use of working capital are of great importance for the sustainable financial condition of the enterprise.
The structure of working capital is understood as the ratio between the individual elements in the total amount of working capital. The structure shows the share of each element in the total amount of working capital. The largest share in the structure of circulating production assets is production stocks. An important indicator characterizing the structure of working capital is the ratio of working capital in the sphere of production and circulation. Achieving an optimal level is essential to ensure the efficiency of the use of working capital.
The composition and structure of working capital are not the same in different sectors and sub-sectors of the economy. At each particular enterprise, the amount of working capital, their composition and structure depend on many factors of a production, economic and organizational nature, such as:
sectoral features of production and nature of activity; the complexity of the production cycle and its duration; the value of inventories and their role in the production process; terms of delivery and its rhythm; settlement procedure and settlement and payment discipline; fulfillment of mutual contractual obligations.
So, in mechanical engineering, where the production cycle is long, the proportion of work in progress is high. In the enterprises of light and food industry, the main place is occupied by raw materials and materials (for example, in the textile industry). At the same time, in the food industry (for example, dairy, butter and cheese), stocks of auxiliary materials, containers, finished products are relatively high.
In enterprises where a large number of tools, devices, appliances are used, the proportion of low-value and fast-wearing objects is high (in mechanical engineering and metalworking). In the extractive industries, there are practically no reserves of raw materials and basic materials, but the share of expenditures of future periods is large. In addition, for example, in the oil industry, an increased share is made up of auxiliary materials, spare parts for the repair of fixed assets.
The value of finished products, shipped goods, receivables are influenced by such factors as the conditions of sale of products, forms and status of settlements.
Working capital can be classified (Fig.3.2):
(a) By place and role in the production process into four groups:
funds invested in production stocks; funds invested in unfinished products; funds in the form of finished products; cash and cash in settlements;
b) according to the degree of planning, working capital is divided into standardized and non-standardized. The standardized ones include all circulating production funds and part of the circulation funds in the form of residues of unsold finished products in the warehouse. To non-standardized – other funds of circulation (receivables, funds in unfinished settlements, cash);
c) according to the degree of liquidity, working capital is divided into fast-implementing and slowly implementable. First-class liquid funds are money in the cash register or in bank accounts; short-term financial investments (deposits, securities, goods and property purchased for the purpose of resale) are also included in the fast-performing ones; real accounts receivable; goods shipped, the payment for which has not come. Slowly implemented working capital are semi-finished products, work-in-progress, stale goods in the warehouse, dubious debt. Accounts receivable always divert funds from circulation, means their inefficient use, leads to a tense financial condition of the enterprise.