Working capital is the sum of cash that is advanced in order to create circulation funds and production assets, which ensure the continuity of the economic activity of the enterprise.
The difference in the structure of funds of individual companies is due to various factors, including the conditions for doing business, the conditions for marketing and supply, the specifics of the activity, the location of consumers and suppliers, and the structure of production costs.
Working capital includes objects of labor, such as material, raw materials, fuel, and so on, means of labor that have a service life of not more than a year and a cost of not more than 100 minimum wages, semi-finished products, work in progress.
The total amount of working capital used in production is mainly determined by the duration of the production cycle, the perfection of technology, the level of technological development, and the organization of labor.
Working capital in each circuit are sequentially three stages: cash, production and commodity.
The effectiveness of the use of working capital in an enterprise’s activities affects financial results. When analyzing the effectiveness, indicators such as working capital turnover, solvency of the company, the ratio between borrowed and own funds and so on are used. The analysis of this indicator allows us to evaluate the efficiency of the enterprise and the profitability of production, identify potential risk zones for the company and determine the possibility of further functioning.
The turnover of working capital is defined as the duration of the sequential passage of all stages of production of working capital.
Among the indicators of turnover, the following are distinguished: coefficient of utilization of funds, duration of turnover.
The turnover rate characterizes the size of the revenue from the sale of products with an average cost of resources. The duration of the turnover is the quotient of dividing the number of days of the period in question by the turnover of current assets. This ratio shows the degree of resource utilization. The lower the load factor, the more efficiently the available funds are used at the enterprise.
The analysis process compares the actual turnover with the turnover in the previous period and with the planned value. According to these values, a slowdown or acceleration of the turnover of working capital is established. If the organization shows a slowdown in turnover, this is evidence of a decrease in the efficiency of resource use. Acceleration of turnover means the release of funds. That is, the organization can, using an unchanged amount of working capital, produce more products.
Ways to accelerate the turnover of working capital are the introduction of new technology, the use of more advanced technologies, automation of production. These measures can reduce the duration of the cycle and increase production volumes. In addition, the turnover of working capital can be improved due to a more rational organization of production, compliance with resource savings, accelerated payments and so on.
To analyze the causes of changes in the speed of the process, it is advisable to consider the indicators of private turnover of certain types of assets. These indicators will give an idea of the time during which the funds go through certain stages of production, which will make it possible to more accurately assess the level of effectiveness.