LECTURE
1. STRUCTURE AND CLASSIFICATION OF CIRCULATING ASSETS
The elements of the structure of circulating assetsare as follows (fig. 1):
- Industrial stocks (inventory) (raw materials and basic materials, purchased semi-processed materials, auxiliary materials, fuel, spare parts, etc.);
- Work-in-process;
- Deferrals;
- Finished commodity in warehouses;
- Factory shipments;
- Accounts receivable;
- Cash assets (resources) in the enterprise cash department and on bank accounts.
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Figure 1. The structure of circulating assets of the enterprise
Raw materials represent the production of extraction industry branches.
Materials represent the production which has already had certain processing.
Materials are subdivided into basic ones and auxiliary ones.
Basic materials are materials which are a direct part of a product that is being manufactured (metal, fabrics).
Auxiliary materials are materials which are necessary for providing the normal production process. They do not belong to the composition of a finished product (greasing, lubrication, reagents). Semifinished goods are products finished by processing at one repartition (redivision) and transmitted for processing to the other repartition. Semifinished goods can be owned ones and purchased ones. If semifinished goods are not made at the owner's enterprise, and are bought from the other enterprise, they belong to purchased objects and are part of industrial stocks.
Work-in-process is production (work) which did not undergo all stages (phases, repartitions), stipulated by the technological process, and also products which are short of components, incomplete, which did not undergo tests and technical acceptance.
Deferrals are expenses (charges) of the given period subject to repayment due to the prime cost of the subsequent periods.
Finished commodity in warehouses represents completely perfected finished goods or the semifinished goods which were received at the enterprise warehouse.
Accounts receivable represent money, which physical or legal persons owe for delivery of goods, services or raw materials.
Cash assets (cash means) are money resources which are in the enterprise cash department, in settlement of accounts of banks and in calculations.
On the basis of element structure of circulating assetsit is possible to calculate their structure which represents specific weight of cost of separate elements of circulating assetsin their general cost.
According to sources of formation circulating assetsare divided into owned ones and borrowed ones. Owned circulating assetsare formed at the expense of the enterprise company's equity (authorized capital stock (chartered capital), capital reserves, profit accumulation, etc.). The structure of borrowed circulating assetsincludes bank credits, and also bills payable. They are given to the enterprise for temporary usage. One part is paid (credits and loans), the other part is free of charge (bills payable).
According to the degree of controllability circulating assetsare divided into rated and non rated ones. Rated circulating assetsare those, which provide manufacturing continuity and promote effective usage of resources. These are industrial stocks, deferrals, work-in-process, finished goods in warehouses. Money means, factory shipment s, accounts receivable belong to non-ratedcirculating assets. The absence of norms does not mean that volumes of these assets can change at random. The operating procedure of payments between enterprises stipulates the system of sanctions against the growth of defaults in payment.
Rated circulating assetsare planned by the enterprise whereas non-ratedcirculating assetsare not the object of planning.
2. CIRCULATION OF CURRENT ASSETS. TURNOVER INDICATORS
Circulating assetsare in constant movement. Capital turnover covers three stages: procurement, production and marketing.
Any business starts with some sum of cash which are put into a certain amount of resources for manufacturing (production).
At the stage of manufacturing resources are embodied in goods, work or services. The result of this stage is the transition of circulating capital from the production form into commodity.
After the realization of the finished product the circulating capital from the commodity form again passes into monetary one. Volumes of the initial sum of money and proceeds from the realization of production (work, services) do not coincide in size. The received financial result of business (profit or the loss) explains the reasons of discrepancy.
The time of full turnover of circulating assets is the time (period) of circulating assets revolution.
Time (duration) of circulating assets revolution represents one of turnover indices. Turnover coefficient is the other turnover index.
Turnover coefficient is the amount of revolutions which is made by circulating assetsduring a certain period; turnover coefficient is calculated according to the following formula:
Ktno = Preal /CAaver,
where Preal - volume of realized production during the period under consideration;CAaver- the average sum of circulating assetsfor the same period.
Time (duration) of a revolution is usually called turnover in days. This index is defined according to the following formula:
T = D / Ktno,
where D – the number of days in the given period (360, 90, 30); Ktno - turnover coefficient.
The unfolded expression for the turnover index is as follows: T = (D*CAaver) / Preal.
At each stage of circulating assetsturnover it is possible to define specific turnover of each element of circulating assets:
Ti = (D*CAaver i) / Preal.
It is possible to calculate specific turnover indices according to a particular revolution. A particular (special) revolution for material stocks is their consumption for manufacturing, for work-in-process is taking goods into warehouses, for finished goods is shipment, for factory shipments is its realization.
Average sums of circulating assetsfor the period, which are used when calculating turnover indices, are defined with the help of the average chronological formula. The average annual sum (the average annual residues of circulating assets) is found as arithmetical mean of four quarterly sums:
CAaver.ann.= (CAIquart+CAIIquart+ CAIIIquart +CAIYquart) /4
The average quarterly sum is calculated as the arithmetical mean of three average monthly values:
CAaverquart = (CA1mon + CA2mon + CA3mon) /3
The expression according to which the monthly average sum is calculated has the following form:
CAavermon = (CAmonbeg + CAmonend) / 2
The sum of circulating assets which is at the disposal of the enterprise should be large enough for the circulation process not to be interrupted. At the same time, availability of circulating assets surpluses has the negative effect on the results of the enterprise activity.
3. METHODS OF DEFINITION OF DEMAND FOR CIRCULATING ASSETS
The effective usage of circulating assets in many respects depends upon the correct definition of the need in circulating assets. Understating the value of circulating assets entails instability of the financial position, faults in the production process and the decrease of manufacturing volumes and profit. Overstating the value of circulating assets reduces opportunities of the enterprise to make investments (capital expenditures) for production expansion.
The need for circulating assets depends on the set of factors: volumes of production and realization; the character of the enterprise activity; the duration of a production cycle; kinds and structure of consumed raw materials; rates of production volumes growth, etc.
Accurate calculation of the enterprise need in circulating assets should be carried out with taking into account the time of circulating assets stay in the sphere of production (manufacture) and the sphere of circulation.
The time of circulating assets stay in the sphere of production (manufacture) covers the period during which circulating assets stay in the state of stocks (resource) and as work-in-process.
The time of circulating assets stay in the sphere of circulation covers the period of their stay in the form of the residues of non-realized production, in the form of factory shipments which have not yet been paid, accounts receivable, in the form of cash assets (resources) in the enterprise cash department and on bank accounts.
The higher is the speed of a revolution (total time of stay in the sphere of production and in the sphere of circulation), the less is the need in circulating assets.
The enterprise is interested in the reduction of its circulating capital size. But this reduction should have reasonable limits, since circulating assets should provide the normal mode of the enterprise work.
When defining the optimum need in circulating assets the sum of cash assets is calculated, which will be advanced for creating industrial stocks, backlogs for work-in-process and accumulation of finished commodity in warehouses. For this purpose three methods are used: analytical one, coefficient one, and the direct account method.
The essence of the analytical method (or the experiment and statistical method) is as follows: when analyzing available inventory holdings their actual stock is corrected and excessive and unnecessary values are excluded.
When using the coefficient method the norm (standard) of the prior period undergoes amendments for the planned change of volumes of manufacturing and for the acceleration of the capital turnover.
Analytical and coefficient methods can be applied at those enterprises which function more than a year, have generated the production program and have organized the production process, have statistical data for the previous years and do not have sufficient amount of qualified experts for more detailed work in the field of planning circulating assets.
The methodof the direct calculation provides the calculation of stocks for each element of circulating assets. This method is used when organizing new enterprise and periodic specifying of the need for circulating assets of the operating enterprise.
The general specifications (norms, standards) of owned circulating assets are defined as the extent of their minimal need for the formation of stocks of raw material, materials, fuel, work-in-process, deferrals, finished commodity.
The common norm (standard) of circulating assets consists of the sum of special norms:
Ncom = Nis + Nwip + Nfg + Nd,
where Nis- the standard of industrial stocks; Nwip - the standard of work-in-process;Nfg - the standard of finished goods;Nd - the standard of deferrals.
The standard of industrial stocks depends on daily (day and night) average consumption of raw materials, materials, fuel and the norm of the stock in days:
Nis = Consd x Tdays,
whereConsd - daily (day and night) average consumption of the given kind of raw material or materials (in monetary units);Tdays - the norm of the stock in days.
The average norm of the stock in days is estimated in whole as the weighted average value of norms of the stock of circulating assets for separate kinds.
The norm of the stock in days for a separate kind of circulating assets consists of the following components:
Tdays = Ttrans + Tcur + Tins + Tseas,
whereTtrans - the transport stock;Tcur - the current warehouse stock;Tins – the insurance (the guarantee stock);Tseas - the seasonal stock.
The transport stock is established according to the duration of the transit time of the cargo from the supplier to the consumer with taking into account the time of documents circulation.
If there are several suppliers the transport stock is defined as the weighted average value with taking into account the duration of the transit time and the volume of supply:
Volume of supply | The transit time of the cargo | Days |
The 1-st supplier | ||
The 2-nd supplier | ||
The 3-rd supplier |
Ttrans = (20 ×15 + 30 × 14 + 10 ×12) /(20 + 30 + 10) = 14 days
The current warehouse stock of material assets is the stock which provides the needs of manufacturing for the period between their two regular intakes.
The structure of circulating assets includes the average current stock accepted at the rate of 50 % from duration of the interval between two adjacent deliveries:
Tcur = I / 2,
whereI - the duration in days of the interval between deliveries.
The average interval between deliveries can be calculated according to the following formula:
I = 360(180, 90) / ND,
whereND - the number of deliveries during the period.
The stock intended for providing the needs of manufacturing in case of the delay of material assets delivery is referred to as the guarantee (insurance) stock of material assets.
Calculating in different ways the size of circulating assets, which is necessary for their normal work, increases the efficiency of using this resource.
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