Working capital of an enterprise is those cash resources that are advanced in revolving funds (production sphere), as well as circulation funds (circulation sphere). In turn, revolving funds consist of inventories, work in progress and semi-finished products of own manufacture and expenses of the future period.
Any enterprise engaged in production activities has working capital necessary to ensure the uninterrupted production process and sales of manufactured products.
These financial resources of the enterprise are temporarily in stocks of commodity and material values, securities, receivables, cash, short-term liabilities and can be converted into cash during one production cycle (or calendar year).
Working capital of the enterprise in content includes objects of labor that are involved in the production process with the ultimate goal of production. Their absence or deficit can lead to interruptions or a halt in production.
Unlike fixed assets, negotiable are in constant motion. They make a circuit to ensure the continuity of production processes.
Working capital goes through 3 stages of the circuit: 1 - cash, 2 - production, 3 - commodity.
At the first stage, working capital is used to finance production stocks, which helps to ensure the rhythm of technological processes. Then (the second stage) working capital goes directly to production with the aim of advancing semi-finished products, work in progress and finished products, as well as deferred expenses. At the third stage of the circuit, these funds enter the sphere of circulation and, as a result of the sale of products, again acquire a monetary form.
All these three stages are interconnected. The correct ratio of stages accelerates the turnover of funds and increases work efficiency. The cash difference between the amounts of funds at the first and last stage of the turnover shows the financial result of the company.
The effectiveness of the enterprise depends on the size and structure of working capital. It is important to correctly determine the optimal need for them in order to be able to profit with minimal costs. Underestimation of the size of working capital can lead to instability of the financial condition of the enterprise, and overestimation - to their irrational use.
Working capital of the enterprise is formed initially from the authorized capital. The size of their enterprise sets independently at the standard level, which means their minimum, but sufficient for production activities.
The largest share is held by working capital allocated for servicing production processes and the initial stages of product sales. This part of the funds is the subject of special attention and constant control of the financial services of the enterprise.
Working capital is renewed with a certain regularity.
According to the source of education, current assets of the enterprise are divided into the following groups: own, borrowed and attracted.
Own working capital of the enterprise play a major role in the circulation of funds and ensuring the property and operational independence of the enterprise. This part of the funds is formed at the stage of creating the enterprise (authorized fund). Further, they can be replenished at the expense of profit and stable liabilities.
Borrowed funds are attracted to reduce the overall needs of the economy in funds, as well as to stimulate their effectiveness. These funds are formed by short-term bank loans.
Funds can also be formed by raising funds (foreign investment).
All groups of working capital must be correctly correlated to ensure financial independence of the enterprise.