In various economic schools, the concept of capital is often interpreted in different ways. According to the writings of Ricardo, this word indicates the part of the national wealth used in production. And Karl Marx called capital goods that, when used wisely, allow them to increase their quantitative value through investment in production.
Modern concept
Capital is not something individually specific, neither a product, nor finance, but as for the latter, they, of course, happen at the stage when it is put into production with the goal of making profit. This is a completely ordinary form of materialization of property, a kind of circulation of funds of the owner, aimed at obtaining a certain income. And therefore, the general concept of capital means everything that can generate income. Therefore, it can be both means of production, and finished goods, and finance.
Negotiable process
The capital cycle is the path along which its continuous movement through production circulation and spheres follows, which ensures the creation of surplus value and its new reproduction. In a market economy, revolving financial investments are considered especially important. This is largely due to the fact that they are part of the creative category. And this is the very component that transfers its own invested value to the newly created product in full, and then at the end of each circuit returns to the businessman-industrialist in cash, which in a quantitative ratio will be larger than the one invested. From which it follows that working capital was and will be one of the most important criteria in determining the profit of production.
The capital cycle: formula and stage number 1
In the course of its movement, capital goes through several stages, the so-called stages, after which it returns to its original form. That is, initially advanced in the form of cash, it goes through three stages of circulation.
The first includes such actions: capital, which in the formula will be marked with the letter D (money), is spent by the entrepreneur, that is, a person with finances, on the means of production (indicated as JV), as well as on labor (Rs). Both Cn and Pc at this stage of the capital cycle are goods acquired for the organization of production processes of the enterprise. Due to the fact that not only working equipment is needed to start the activity, for the purchase of which part of the capital goes, but also the services of hired employees are needed, they are also designated in the formula as goods - due to the allocation of funds to pay for their labor.
Stage No. 2
Further, the forms of capital change, "money" (D) goes into "productive" (P). As a result of the functioning of the production process, it then takes on a commodity form (T). Naturally, the goods produced differ from those purchased at the first stage, both qualitatively (in terms of the external aspects of the newly created product) and quantitatively (in the estimated cost of consumption plus the surplus value). For example, at the first D-stage, sewing equipment, materials, etc. were purchased for part of the capital, and cutters, seamstresses, etc. were also hired. Well, at the second P-stage, tracksuits were sewn. This example clearly shows the difference between the goods of the first stage and those obtained as a result of the production process.
Stage No. 3
At the third stage, the circulation of capital of the enterprise again goes into the sphere of circulation: the entrepreneur brings to the market and sells manufactured goods there, receiving the money spent on them and additionally surplus. In the end result, the invested finances were transformed from the commodity form (T) again into cash (D).
In the third stage, the movement of capital is the sale of manufactured goods to the consumer. The return back to the treasury together with the surplus value in the form of cash (D) means that its circular movement has completed and arrived in its original form at its original position. Only now the businessman has already a much larger amount of money than before. Then he again starts the circuit and the circulation of capital from one form to another, again conducting it through three stages of circulation. This determines the continuity of the process.
Ensuring continuity
So, from what has been said above, we see that the circulation of capital is accomplished through three functionally active stages. Where the second, that is, the productive, is considered the most important, because it is in it that the creation of surplus value occurs. The path of successive passage of each stage changes the form of capital from one to another. In fact, the movement of capital by itself will not be limited to just one cycle, since the entrepreneur will again and again launch funds into the movement, with a completely understandable goal - to provide himself and his business with even greater and steadily growing surplus value. And the continuity of the production process can be achieved if capital not only moves from one form to another, but will be constantly present simultaneously in all three forms.
Assignment of working capital
The funds that serve the process of activity and at the same time participate directly in the creation of new goods, and at the same time in the process of selling products, allow the concept of working capital. Its main purpose is to ensure the rhythm and continuity of the financial production cycle. Acquired means of production (JV) have another name - "capital of the enterprise." Its concept as a joint venture, in turn, is divided into objects of labor that take part in the creation of marketable products and services (PC), they also have a functional difference in participation in the production process.
Fundamental difference
The peculiarity of working capital is that it is not spent, not consumed, but advanced in various types of current costs of entrepreneurial activity. The purpose of such advance payment is the creation of inventories, the construction of unfinished elements of production in order to increase the number of finished products and organize even better conditions for its successful implementation.
Investment in the creation of production
Advance means that the allocated funds for starting up the capital circuit are returned to production after each completion of the cycle, which includes:
- Manufacturing products.
- Its sale to the consumer.
- Revenues from sales.
Simply put, it is from the proceeds from the sale of manufactured goods that the advanced material part is reimbursed, and specifically, it is returned to its original (D) value. Thus, it becomes clear what working capital is. It can be characterized as a combination of financial resources launched for the organization, the establishment of the production process through the use of circulation funds and working capital investments.
Production capital
Means of labor comprise the property content of fixed assets, such as the bulk of finance, workshops, work equipment and other production working instruments, relating to the future development policy of the enterprise in order to increase profitability.
Regardless of the division of the enterprise’s capital into its own, main, borrowed, or circulating, as well as constant or variable, it is in a constant process of continuous movement, just taking various forms, due to being in a particular stage through which the cash flow is currently going through funds.
Means of production
The means of production include objects of labor, including materials, raw materials, components, semi-finished products and the like. All of them participate in the production and technological cycle that completes the capital cycle, and at the same time they are completely consumed during the time period of one such circle. The money spent on this quickly turns around, blocking the cost of living productive labor, creating commodity products in the same techno-production cycle.
Speed measurement
One of the important evaluation criteria characterizing the circulation and turnover of capital is to determine the speed of its movement. The first measurement of speed is the value of the time period during which the entire amount of money advanced by him returns to the capitalist in the form of revenue, which increased by the amount of profit. This length of time is 1 revolution.
The second measurement of the working capital velocity is the number of calls of the advanced investment for 1 year. This measurement is a derivative of the first, calculated by dividing 12 annual months by a time of 1 revolution.
Separate parts representing the movement of capital in the industrial sphere are distinguished by individual characteristics of material and material means of production and will turn around at different speeds.
As for the means of labor, which include structures, structures, machine tools, machinery and other equipment, the period of functioning of such amounts from several years to several decades. They are part of the material and technical base of an industrial enterprise and are consistently involved in most production and technological cycles.
Target regulations
Working capital is required to be maintained in a size that provides steering optimizing production management. For this, it is necessary to determine the formulation of objectives pursuing strategic goals.
For example, the financial and economic characteristics of production are its liquidity, that is, the ability to convert assets into cash in order to pay off payment obligations. Its high enough level for any enterprise is the most important characteristic of activity stability. The loss of liquidity can result not only in additional costs, but also in periodic shutdowns of the production process.
A low level of capital turnover will not be able to properly support production activities. Therefore, there may be a loss of liquidity, malfunctions and, as a consequence, low profit. For each enterprise there is an optimal level at which maximum profit is possible.
