Working capital refers to an important part of the property of any enterprise. During one production cycle, these resources completely change their material expression into a monetary form. Therefore, they are called the mobile part of the property.
The share of current assets in assets is constantly monitored by the analytical service. The lack and oversupply of these resources equally negatively affects the results of the company. If the amount of working capital accumulates, the speed of their turnover decreases. Because of this, profit is reduced.
The lack of mobile means accompanies downtime, malfunctions during the course of the production cycle. It also negatively affects financial results. Therefore, the standards and approaches to the analysis of assets in circulation deserve careful consideration.
Working capital mobility
The company's working capital consists of stocks, materials, short-term investments and receivables. They in the production process become finished products and are sold in the operational period. The cycle ends when the proceeds from their sale are returned to the organization’s accounts.
The share of current assets in assets is under the tireless control of the financial service. In addition to the fact that the amount of the company's profit depends on the speed of turnover, these resources form the investment rating of the company.
The fact is that such property can most quickly be converted into cash. Accordingly, the more mobile resources the company has at its disposal, the faster it will be able to settle accounts with creditors if necessary. Therefore, these funds are called liquid.
Liquidity concept
The availability of working capital in an amount commensurate with or greater than the short-term obligations of the company guarantees the repayment of credit funds on time (for the operating period).
The concept of liquidity has incorporated several definitions. First of all, it provides an opportunity to quickly respond to financial difficulties. Secondly, liquidity allows you to increase the balance sheet currency according to sales growth. Thirdly, it guarantees the timely return of short-term obligations.
Adequate liquidity of property opens up new opportunities and benefits for the enterprise. It means complete management control over its assets, as well as financial stability.
If this indicator is normal, then the company management competently disposes of the property entrusted to it.
Lack of liquidity
The insufficient share of working capital in assets leads to a number of problems. First of all, production suffers. The lack of raw materials affects the speed of production of finished products. When the technological cycle slows down, the amount of profit decreases.
In addition, the lack of liquidity in the structure of the balance sheet currency leads to a partial or complete loss of financial independence. Sometimes the company may even face bankruptcy.
Lenders cannot receive their funds and interest on time. This reduces the rating of investment attractiveness of the company. She has to work in the most adverse conditions. Therefore, the share of working capital and liquidity should not be lost from the field of view of the financial service of the enterprise.
Formula
In order to correctly understand what liquidity is, the formula of which will be presented below, it is necessary to consider the logic of calculations. It involves consideration of the entire amount of current assets, as well as their structure. Total (or current) liquidity is calculated as follows:
Ktl = OA / KO, where OA - the average annual amount of the current portion of the assets, KO - short-term liabilities.
The data for the assessment are taken from form No. 1 of the financial statements - balance sheet. In this case, liquidity, the formula of which was presented above, will look like this:
Ctl = (p. 1240 + 1220 + 1250 + 1232 + 1260 + 1231) / s. 1600
However, this is the most common indicator. The fact is that the property of the company is characterized by a different speed of turnover. Therefore, the structure should be considered separately.
Other indicators
In addition to current liquidity, it is necessary to evaluate its intermediate and absolute value. The share of equity in current assets is also examined. Intermediate liquidity does not take into account the stocks most slowly sold as part of current assets. The formula would be:
Kpl = (OA - Z) / KO, where Z - reserves.
The most liquid assets are cash. Therefore, this balance sheet item is also sure to pay attention. Absolute liquidity is calculated as follows:
Kal = DS / KO, where DS is cash.
Estimating the share of current assets in the total property, one cannot ignore the security of the company with its own current assets. The coefficient will look like this:
Ksos = (KO - ON) / OA, where HA - non-current assets.
Normative values
The share of working capital in assets should have a certain value. The standard is set in accordance with the type of industry in which the enterprise operates. For each type of liquidity indicators, its own boundaries are also defined.
So, most domestic and foreign companies maintain a current liquidity ratio of at least 2. That is, current assets should exceed current debt by 2 times. But this is not the only criterion.
Interim liquidity should comply with 0.7-1. It is not advisable to lower the indicator below 1, but it all depends on the industry. Absolute liquidity is normally 0.2-0.5. The minimum allowed value is 0.1.
The indicator of security of turnover with own sources of financing should not fall below 0.1. Fulfillment of all these conditions indicates the correct balance sheet structure, as well as financial stability and investment attractiveness of the company.
