Current assets are understood to mean such resources that the company has already invested in production and uses in funds. These funds, as the name implies, "turn around." Usually the term for such a “work of money” varies from six months to a year.
What for?
Management of current assets of the enterprise allows you to achieve the following:
- a high level of efficiency of the real use of capital, coupled with an increase in profit;
- maintaining liquidity at a level that allows you to prepare about the competitiveness of the enterprise, while assets as a percentage of the obligations undertaken by the organization only grow;
- the enterprise operates without failures and “failures”.
For an adequately working enterprise, the management of current assets is aimed at achieving working capital with a quality structure and a large volume. Assets must be maintained liquid. Only when this is achieved can we say that funds can turn into money.
General theory
Management of current assets of the organization should be based on the structure of the subject and the characteristics of its management. For example, if we are talking about a trading company, then more attention should be paid to the development of the product base, while for an industrial company, materials and raw materials that are indispensable in the process of manufacturing a product come first. If we are talking about a structure working in the field of money, then money, as well as various currency equivalents, are of key importance.
Methods of managing current assets should take into account the division of capital into two components:
- a variable;
- permanent.
The enterprise disposes of some volume at any moment of time. This is such a minimum value that allows you to maintain economic activity. It is customary to say that this is the basis of working capital. If an enterprise suddenly begins to need large resources, variable capital is formed.
It is important!
Operational management of current assets only then shows sufficient efficiency when attention is paid to the following factors:
- asset liquidity;
- their volumes;
- the ratio between borrowed funds and own;
- net working capital;
- balance between variable and constant capital.
Please note that all of the items listed are closely related. Integrated financial management of current assets involves the multiple use of a resource in the production process of fixed assets and the use of only one cycle of current assets. The cost of OK goes to the product, which is the result.
How do we manage?
Modern approaches to the management of current assets recommend allocating four procedural blocks:
- the formation of the financial cycle;
- cash flow analysis;
- forecast of the development of the situation;
- determination of the optimal level of current assets.
Participating in such work current assets are divided into:
- working within a given production cycle;
- working in a given financial cycle;
- all inventories, as well as all receivables with pre-deducted accounts payable.
Such assets that collectively combine all current assets, including inventories and warehouses, serve the production cycle. This includes products that are partially, completely, unfinished.
Asset structure
Management of financing of current assets is based on the organization's affiliation with a particular industry. How much this affects the structure is calculated in the analysis of turnover indicators. They are calculated as follows: specify the size of the assets, identify the average daily earnings and determine the percentage ratio between these values.
The efficiency of managing current assets at different stages of enterprise development cannot be the same. Any organization is characterized by periods when it is on the crest of a wave, that is, successful and profitable, “eras” of stability and stages when sales fall, and the organization as a whole is in danger of a crisis. Current assets at each of these steps are somewhat different in structure.
If a company finds itself in a situation of intense market competition, it should ensure that customers can defer payment. At the same time, warehouses should at any time have sufficiently large stocks to satisfy the needs of customers. It is simpler for monopolists: such organizations have the right to insist that transactions be concluded on terms favorable to them, that is, with a reduced credit period and a small product range available (only the most popular items). The first type of activity is characterized by a large volume of current assets; with the second type of activity, their reduction is allowed.
Modern management approaches
The stages of managing current assets with different methods may vary slightly, but the classical scheme looks like this:
- planning;
- control of results;
- development of management decisions.
At the planning stage, the company’s policy regarding current assets is formed. Managing staff makes a decision based on the recommendations of the heads of departments responsible for finance, production and sales. The final decision is approved by the general director of the enterprise. The policy controlling the management of current assets and working capital dictates how large the volumes of manufactured products should be, how long they should be stored, how small the inventory in the company can be, and also the conditions under which the goods are offered to customers in installments.
Methods and Risks
Management of current assets of the enterprise involves the selection of one of three well-known approaches (or a combination of several):
- aggression;
- conservatism;
- moderation.
The policy of management decisions in relation to current assets allows you to formulate the exact terms of loans, limits of the proposed borrowed funds, as well as basic conditions on which you can cooperate with customers, suppliers of raw materials, contractors. When the basic conditions are worked out, the company's management evaluates how great the needs of the enterprise are in the above items and whether the policy needs to be reviewed.
From the policy it follows whether the enterprise will be ready for risky and crisis situations associated with a lack of assets. Most often, the following unpleasant situation occurs: the production lines are idle, because the company does not have enough raw materials for the correct operation. This happens either because of debts, or because of a shortage of goods from suppliers. It is difficult to foresee the risks, the most effective mechanism for this is to prescribe in the contract situations when one of the parties violates the conditions and the sanctions that follow in such circumstances.
How to improve
Improving the management of current assets usually occurs in two stages:
- calculation of standards;
- liquidity assessment.
First, the regulatory value is calculated separately for each variety of current assets. They start with money advanced in reserves, as well as with money stored in the bank and receivables.Specific values are selected by analyzing the extent to which it is planned to sell goods and how large the life cycle is for them.
As for the second stage, it is considered as a preset that all current assets are to some extent liquid, but the main task of the policy being developed is to raise the general level to the norm so that the financial obligations of the organization are fully provided. This should apply to the planning period (usually a fiscal year).
For example
The policy of managing trading assets of a trading company aims at increasing liquidity, given that current assets can be divided into the following groups:
- ready-made assets (at the cash desk, on the account and other money at the disposal of the organization);
- assets in a form that can quickly lead to cash (short receivables);
- assets in the form for which the liquidity level is estimated to be quite low (stocks of goods, raw materials, items with rapid depreciation and low value).
Optimized management of current assets involves the formation of a payment schedule, clarification of the volume of turnover, on the basis of which conclusions are drawn on how large ready-made assets should be. The detected amount is called irreducible.
Profitability as an economist’s work tool
The current asset management policy usually considers profitability as a method of increasing the efficiency of an enterprise. No less important is this concept in relation to current assets.
The company makes a profit by using current assets in the production process. They serve the economic activities of the organization, at the same time, individual subspecies can become a source of direct income. We are talking about dividends, interest received when using the assets of the company.
So that the return on current assets is an effective tool, a theory has been developed that divides assets into groups:
- sources of direct income;
- assets that do not allow direct income.
The first include:
- financial investments for a short period of time;
- stock instruments;
- funds in the current account, allowing to make profit in interest.
We are not losing anything!
Effective management of current assets involves measures aimed at minimizing losses in the production process. It should be understood that a certain probability of loss is inherent in any category of a current asset.
For monetary assets, the most dangerous factor is inflation. The losses associated with it can be very significant for the enterprise. If a company has invested its money in some financial structure, you can lose money due to unfavorable market conditions and the same inflation. Making money, transferring it on a loan to the needy, the company makes itself dependent on the client, who may not return the money on time or not bother to return it at all. In addition, this person may become bankrupt. Again, inflation is inherent in this situation. Finally, if we are talking about assets placed in raw materials and goods that are in the company's warehouses, then losses can be provoked by natural causes.
Due to these reasons, the management of current assets must be organized in such a way as to minimize the likelihood of such losses. Most noteworthy is the inflation factor.
Why is this significant?
Distinctive features inherent in most modern Russian companies:
- working capital is about half of the assets or even more;
- the use of working capital effectively allows you to achieve greater profitability of the enterprise with less risk;
- rationality eliminates the situation of money shortages.
The organization of the management process requires a lot of time and effort, therefore, for the correct solution of this problem at a large enterprise, a specialist is required who is responsible for this issue. Every day, various amounts are invested in current assets that need to be regularly monitored, otherwise cash flows will not be used efficiently and rationally.
But if the process can be adjusted, then the profit will increase with a small probability of commercial risk. The organization of affairs helps to determine the level of responsibility for working capital.
Analysis is also a tool
The analysis of working capital does not begin with the current period, but with the one before it. Specialists study the dynamics of changes in funds in circulation, as well as calculate the rate inherent in this time average amounts. The ratio of average current assets and sales is revealed. Analysts receive data on how the proportion of the turnover changes.
Next, you need to analyze how the volume of stocks of the enterprise, receivables are changing, and also to calculate how large the balances of assets in terms of money. Here, the data is obtained from the current situation in the company. Relations are revealed with how quickly the volume of production and sale of services and goods is changing.
It is necessary to analyze the speed of their turnover for individual subspecies of working capital. Data is revealed against the background of general indicators for the company. This gives an understanding of the loops:
- production;
- financial;
- operating room.
Specialists determine how long each cycle is.
Finally, they identify the profitability of working capital, consider the sources of financing and how large each of them has a relative weight relative to the total value of dynamic finances. This allows us to formulate how large and what kind of financial risks are due to the structure of working capital.
Such an analysis allows us to draw conclusions about how effectively the organization manages current assets. In addition, analysts will identify what are the weak points and in what areas - the future of the company. This will help improve overall production efficiency.
What will play a significant role?
In some cases, working capital at the enterprise are present in a value less than the normative. For such cases, it is characteristic that the needs of the company do not satisfy the recommended. How to increase working capital?
The first instrument is long-term loans. If there are few of them, you can get another one, as the modern structure of the economy proves: long-term loans are beneficial for companies planning to work for a long time. In particular, it is characterized by low interest rates, as well as a long reimbursement period. Another effective tool is immobilization, when money is transferred to non-current assets. True, this can be done with one caveat: if it does not harm the production process. If the active part is retained, in some cases it may be advantageous to close long-term financial investments, at least in the case when the analysis shows that they do not play a significant role in the overall monetary picture.
It seems reasonable to increase equity through the Charter. At the same time, it is also recommended to reduce dividends, reserves, and retained earnings. Aggressive company policy and accurate cost accounting will improve the profitability of the enterprise as a whole.
A decrease in receivables is allowed. This option is fraught with a certain risk, as some customers may simply "run away", therefore it is recommended to resort to it only as a last resort. The following methods come to the rescue here:
- factoring;
- bill accounting;
- spontaneous investment of money.
Do not hurry!
Before taking measures to optimize current assets, study the market in which you work. Only after that you can "chop off the shoulder." This primarily relates to deferred payments. Of course, reducing the average duration can bring some benefits to the company, but here it is important not to lose more than to gain. Estimating the deferrals, please note: how do the indicators of growth in turnover and losses provoked by deferrals compare? Perhaps these values are approximately equal, then the risk is completely unjustified.
Working to improve the structure of current assets, analyze your clientele. Among them, for sure, there are dubious buyers who are in no hurry to fulfill their obligations. Selective work with clients leads to much better results than generalizing policies for all counterparties at once. More often remind debtors who do not pay attention to the deadlines that the time has already passed - this can give a good result. Also look for opportunities that will help improve contact with customers and minimize the volume of transactions with dishonest customers. For this, first of all, it is necessary to establish interaction between the commercial and financial departments within the company.