The level of effectiveness of the activity that the company performs is determined by various factors. But there is a certain component of the company, which can be described as one of the key indicators of the company's prospects. It is his definition that allows us to identify the level of stability and the prospects for the development of the organization.
Net working capital
Initially, working capital should be understood as those elements of resources that are used for a relatively short time, while their cost is part of the costs necessary for the production of a new product.
Working capital can still be described as a cost expression of those objects of labor that are necessary for the production process, and once. It is important to understand that their value is transferred to the cost of goods produced.
The funds used in circulation can be divided into two key types: cash and inventory items. These groups include the following resources:
- costs in the process of work in progress;
- materials, fuel, raw materials, energy, spare parts, semi-finished products;
- deferred expenses;
- finished goods and products;
- short-term financial investments type;
- accounts receivable, the terms of which do not exceed 1 year;
- VAT on purchased assets;
- other current assets.
If in the context of the above concepts we consider net working capital, it is worth noting that it can be defined as the difference between current liabilities (accounts payable) and assets (current assets). Using this indicator, you can identify the degree of coverage of current assets with long-term sources of funds.
You can use another characteristic of net current assets: this is capital that characterizes that part of the resources in circulation for the formation of which long-term borrowed and equity capital was used.
Net Working Capital - Formula
Calculate such type of capital using a fairly simple formula:
FOA = OA - CFD,
Where PFA is defined as the sum of the net current assets of the organization;
OA - the amount of current gross assets of the company;
CFD - current short-term financial liabilities of the enterprise.
There is another formula that allows you to calculate the net working capital:
SOA = OA - DZK - CFD.
By SOA, you should understand the amount own working capital company. OA is the sum of the gross current assets of the enterprise. As for the spare part of the company, in this case we are talking about long-term borrowed capital, which was invested in the current assets of the company. CFD is used to denote the current (short-term) financial liabilities of an organization.
In the case when the organization resorts to the help of long-term borrowed capital, the amounts of own and net resources are the same.
The need to use net working capital
In addition to determining this type of resource, it makes sense to understand the reasons for its relevance to the enterprise. Calculation of this type of capital is important, since it is this category of assets that helps maintain the financial stability of the company. This can be explained by the fact that an organization that does not have sufficient resources to fulfill short-term obligations is not able to repay such obligations.And if the level of own working capital exceeds the necessary minimum, the company will be able to create certain reserves to expand its activities.
But at the same time, the following fact should be taken into account: if the level of working capital significantly exceeds the optimal needs of the organization, it makes sense to talk about the irrational distribution of company resources. For this reason, this value of net working capital should be constantly analyzed. This is a kind of control of the enterprise’s management of the relevance of the compiled strategy for using the company's own funds.
Liquidity ratio
As such an indicator within the organization, it is pure working capital that is used. Such indicators are needed to determine the degree of solvency of the organization (referring to short-term debts). Their essence boils down to comparing the value of the company's current assets and its ability to pay short-term debt.
Obviously, if there is an increase in equity, then this can be defined as a positive fact, since this leads to an increase in the liquidity of the organization and its solvency. The demonstration of such dynamics is very important in the process of company development, since these indicators positively affect the level of lender loyalty to the company, which is considered as a potential borrower.
How to increase own working capital
This is one of the most pressing issues for a company that intends to experience continuous growth. To achieve this goal, you must initially build a system of efficient use of available resources. This implies the correct calculation of the period of net capital in the production sector of the enterprise and in the circuit (circulation), as well as the economical use of such objects of labor as materials, raw materials, etc.
It is important to understand the fact that the amount needed to generate funds will be lower if you reduce the time spent by this type of capital in the production process.
This means that if the turnover of these funds is accelerated, the enterprise will reach a high level of liquidity much faster. This fact will attract more investment. To achieve the aforementioned acceleration, it is necessary to develop and implement measures that can significantly reduce the time during which net working capital is in transit (delivery), in inventories, the production process itself and in warehouses where finished goods are stored. If this goal is achieved, the products will be able to be sold in large volumes, which will reduce the amount of expenses required to form their own funds.
Conclusion
It is difficult to overestimate the importance that own funds have for the development of an enterprise. Therefore, you should always remember that the net working capital is actually equal to the liquidity level of the company.
Do not forget about those measures that can significantly improve this indicator of the organization. In general, it is precisely the organization’s well-constructed activities that can ensure stable growth of the company and increase its investment attractiveness.
