The working capital ratio is an indicator that determines the minimum size of the number of production resources, the presence of which is sufficient to ensure the normal course of the technological process. This value for a given business entity does not have a constant value. The working capital ratio is directly dependent on the volume of products, as well as on the work of the supply and marketing services, an assortment list of goods and forms of settlements with customers. In the financial sector of the enterprise, this indicator is the most volatile.
The working capital ratio is calculated in cash. The basis of its definition is the estimated cost of the enterprise for the production of goods, which is drawn up for the planned time period. The process of calculating the indicator itself consists of a phased sequential work.
Initially, inventory standards should be developed for each component of working capital. These indicators are the most stable. Their change is possible only if a new assortment list of manufactured goods is approved, contracts are concluded with other suppliers, technological processes are developed and production relations are improved .
At the second stage of calculating the indicator, the amount of working resources is determined, the amount of which is necessary in order to create the necessary margin for the continuity of the production cycle for each element included in the technological process. Thus, the definition of private standards. Each element is calculated by the formula. It expresses the product of the norm of the stock of funds in circulation for an individual element by the quotient obtained from dividing the consumption of this component over the planned period by the value of this period.
The working capital ratio calculated for the enterprise consists of a value that is determined by summing up the private indicators of inventories of production resources. Its size expresses the minimum volumes of goods and material assets that will ensure the smooth functioning of the enterprise.
Working capital ratio is the sum of:
- the norm of inventories for industrial purposes;
- standard work in progress;
- the norm of released finished goods;
- the norm of expenses related to future periods.
The value of the indicator for stocks related to the production of products delimits resources by their individual types or homogeneous groups of materials. The size of this standard directly depends on the time spent by the values in the preparation stage, as well as in the period of the technological process. Including insurance stocks.
The working capital ratio in work in progress is directly dependent on four main factors. These include:
- volume and composition of products;
- time indicator of the technological cycle;
- the nature of the increase in costs during the process of release of goods.
If there is insufficient resources at the enterprise, insufficient to bring it to the normative value, processes occur that contribute to:
- reduction in the release of goods;
- interruptions in production, as well as sales of finished products, and, as a result, failure to meet planned targets;
- violations of the delivery schedules of goods to customers.
In modern market conditions, the value of calculating the standards of working capital of an enterprise is increasing . Their correct application in practice leads to the strengthening of the financial condition of the business entity and its solvency.