Net working capital - what the balance sheet formula shows

• November 27, 2018
• Accounting
• Anna Kuklina

Working capital is one of the main criteria that determines the financial stability and efficiency of a company. The term, introduced into use by Adam Smith, does not lose its relevance to this day. Since what does the working capital formula look like, why do you need to determine its optimal value for the company and the industry as a whole? We will tell you everything in detail below.

Definition of net working capital

Net working capital is an indicator that shows how solvent a company is in the short term. Let me remind you that periods of up to one year are considered short-term.

Let's say the company has working capital totaling 1 million rubles, incl. money in the current account in the amount of 800 thousand rubles. and inventory - 200 thousand rubles.

Short-term debt (this includes loans and credits, as well as debts to suppliers for up to one year) amounts to 700 thousand rubles.

Thus, net working capital (NWC) is equal to 300 thousand rubles. (1,000,000 – 700,000).

In simple words, in the most unfavorable situation, if suddenly for some reason the company no longer receives money from customers, after fulfilling all obligations it will have 300 thousand rubles at its disposal, which the owners can spend at their discretion. What is the meaning of this figure and whether it can be considered 100% reliable, we will look into it further.

What does it consist of?

First, let’s look at what Net working capital consists of:

1. Inventories. These are the remains of inventory items in warehouses. This includes raw materials, materials, semi-finished products, components, fuel, goods for resale, spare parts, workwear and other material assets used in the production, commercial and economic activities of the enterprise.
2. Cash in hand and in accounts.
3. Financial investments are various types of investments: securities of other companies acquired for profit, deposits, etc.
4. Accounts receivable.
5. VAT not presented to the budget.
6. Other means. This may include deferred expenses and other assets with low liquidity.

As you can see, only those listed in paragraphs 1–3 can be classified as highly liquid assets. Accounts receivable defaults to assets with medium liquidity because we don't know what goes into it. It may be difficult to collect some debt.

Points 5 and 6, although taken into account in the amount of net working capital on the balance sheet, have little effect on its turnover, so again you need to look at what amount relates to low-liquid assets and what exactly is included there. In some of our examples we will omit these values ​​to obtain a more visual result.

Sources of working capital financing

Sources of working capital financing include:

• own and equivalent funds;
• funds raised through financial market mechanisms;
• funds received through redistribution.

It is worth mentioning right away that the above classification is quite arbitrary, so each source can be classified into several groups at once. The latter are “own” and “foreign” sources, where the system of financing the organization’s current working capital involves the use of internal (self-financing) and external resources.

Group 1. Self-financing.

We are talking about own and equivalent funds, which include the authorized capital of the company.

• Authorized capital.

When opening a company, the owners’ personal funds contributed to the authorized capital act as their own source of financing. Its size should ensure the operation of the enterprise until the conclusion of the first transactions and advance receipts on them in an amount sufficient to fulfill obligations.

The company needs to purchase equipment, recruit personnel, and prepare workplaces and premises for them. Let's imagine that you decide to run a business entirely on your own, reselling talking hamsters through mailing lists. Even in this case, you will need such tools as a computer, Internet access, databases with email addresses for sending commercial offers, a telephone and the hamsters themselves. This is nothing more than start-up capital.

Often business owners use a minimum authorized capital (MC), the size of which is fixed by law. As a result, only the new company is forced to operate in conditions of a shortage of current assets. The fact is that the smallest amount of guarantees (property interests) of creditors depends on the size of the management company. In the event of bankruptcy of an enterprise, the owners are obliged to answer for obligations in an amount not exceeding this amount.

The minimum amount of the authorized capital is constant, and its size is determined by the founders when opening the company. After this, participants have the right to increase this amount only at their own request. When the minimum wage increases (in accordance with which the minimum threshold is calculated), the smallest amount of authorized capital changes only for new legal entities.

Owners can increase the authorized capital at their own expense if this is required to ensure stable business development, in case of low liquidity, to cover losses, and sometimes to obtain licenses, admission to participate in tenders and auctions. Then the operation must be registered with the tax office. Additional capital also increases by contributing funds to the company’s property. Letter No. 07-05-06/107 of the Ministry of Finance of the Russian Federation dated April 13, 2005 explains that this operation must be reflected in additional capital. Thus, for an LLC, the basis for such actions is Article 27 of the Federal Law of February 8, 1998, No. 14-FZ “On Limited Liability Companies.” In accordance with paragraphs 1, 3, 4 of Article 27 of this law, the owners are obliged, by decision of the general meeting, to make contributions to the property of the enterprise, if this is provided for by the charter when establishing the company. If the original version of the charter does not contain such an obligation, amendments to the charter can be made by unanimous decision of the general meeting of shareholders.

Typically, contributions are made in money, but other options can be provided for in the charter by decision of the general meeting. Contributions to property do not affect the size and nominal value of participants' shares in the authorized capital of the company. In accordance with subparagraph 11 of paragraph 1 of Article 251 of the Tax Code, additional increases in the capital and contributions of funds by participants to the property of the enterprise (net assets, reserve funds) are not subject to income tax.

• Profit.

The role of the main sources of working capital financing is played by all existing types of iteration of the enterprise’s profit. To do this, it is important to take into account the peculiarities of economic laws that apply at different stages of a company’s life. They all operate in a cyclical pattern: growth, stability, decline.

In a stable period, it is worth thinking about developing a new field of activity, new types of products, expanding the range, improving quality, and improving the processes of managing production, financial, logistics and commercial cycles. All of the above allows the company to develop intensively. If you want to follow the extensive path, the business can grow by merging other units and creating new production facilities.

However, there are companies on the market that, even with minimal marginal profits, have normal liquidity to maintain working capital. Most often, this situation occurs among wholesale trade enterprises. The fact is that it is possible to achieve an effect similar to the reinvestment of profits by repeatedly increasing the turnover of assets: goods, accounts receivable, work in progress, finished products, raw materials, materials, components.

Let's look at the situation using an example. We sell 10 units of goods at 20 rubles per unit within one month, the profitability of sales is 5% per unit. In other words, for 10 units of 20 rubles, 5% = 10 rubles. In absolute monetary terms, the amount of profit earned is 10 rubles. Taking into account the number of periods in a given time period (30 days), we divide the profit by the turnover period of the goods. The turnover was 0.33 rubles, that is, we earned this amount for each day of the month by selling 10 pieces of goods at a price of 20 rubles in 30 days. But let's increase turnover 10 times and reduce profitability to 1%, then by increasing sales in absolute terms the profit will be greater than in the first option. This effect can be achieved by increasing the amount earned per unit of time. Then the turnover increases to 0.53 rubles (see Table 2). Large retailers usually operate on this principle.

Table 2. Increasing profitability by increasing volumes and turnover of goods.

It turns out that both profit and revenue can be used as a source of financing fixed and working capital. The example shows that an increase in the company's turnover many times over, an increase in the turnover of any of the assets, creates additional sources of liquidity. And additional profitability becomes a consequence, not the cause of everything that happens.

• Primary activity.

Financing of net working capital is possible through operations that are not directly related to the main activities of the enterprise. This includes implementation:

— technological production waste

, which include shavings, scrap metal, cuttings, used charge, sawdust, etc.;

— illiquid goods

: products that have lost their properties during too long/improper storage; goods rejected by customers; unclaimed reserves of raw materials; materials, components, re-grading, excess stocks that were identified during inventory, etc.;

— obsolete equipment

, equipment that requires too expensive repairs, devices that have fallen out of the technological chain after installing an analogue with a large number of functions, etc.;

— services in social, cultural and household facilities

, such as a cultural center, a canteen, a hostel, a hotel, a preschool institution, a museum, etc.;

— transactions with various financial instruments

, among which are bill discount, a positive balance on currency and amount differences, a positive result on financial investments, for example, in the form of interest when issuing loans to other companies.

Another serious source of financing current assets is depreciation for the current period. All previously made investments in business capitalization from the company’s profits are included in the cost of production and are considered “non-cash expenses of the company.” But when revenue comes in, depreciation has a cash value. The laws of our country allow us to include depreciation as expenses in accounting and tax accounting, so the received liquidity remains at the disposal of the company and turns into an important way of financing working capital.

Group 2. External financing.

Here it is worth mentioning two main ways of mobilizing resources in the asset market: equity and debt financing.

• Equity financing.

There are several possible operations aimed at attracting financing:

— additional issue of shares, which is available only to joint-stock companies;

— increasing the authorized capital at the expense of new investors;

— production and sale of fixed-term securities (bond loan), giving its holders the right to receive dividends and return the funds provided under certain conditions.

But these methods are not suitable for every company, since the state uses antimonopoly laws to regulate excessive concentration of finance. Moreover, the enterprise must have a certain popularity, quotation, and demand on the open market. The actual procedures, for example, listing, are complex and require a lot of time, labor and financial costs.

• Debt financing.

It is one of the quite popular areas and consists of the following types of external financing: lending from financial institutions, use of funds from other organizations. The CFO must convince the potential lender that his company will actually be able to repay the money. To do this, it is very important to properly prepare for negotiations, that is, to make a long-term business plan for a period exceeding the borrowing period.

This business plan must include financial and economic calculations, such as a budget for income and expenses, and a cash flow budget. It is allowed to provide data in the format of work results for different periods in the form of cash flow, that is, the difference between receipts and payments. It is necessary to formulate in the interlocutor a clear understanding of the company’s place in the market, and present him with a register of promising long-term contracts. This package also includes legal and accounting documents.

To remove risks, collateral is used: hard (real estate), mobile (equipment, goods in circulation). If it is impossible to return the funds, they become the property of the creditor. Even if rehabilitation and bankruptcy procedures are used when selling the pledged property at auction, the lender is given the primary right to receive funds. Namely, 80% of the market value, which is determined through the arbitration court, without taking into account the order of satisfaction of creditors, as set out in the bankruptcy law.

There is another approach that allows you to remove risks - this is a guarantee of legal entities and individuals who are participants in the company. Due to this, responsibility for the return of attracted resources becomes subsidiary in nature, and each guarantor bears the same responsibility to the lender as the borrower.

• Funds received through redistribution.

We are talking about funds that appear to the company due to profits or liquidity reserves generated in other subjects of market relations and having various reasons for entering the company. That is, we are talking about financing activities through dividends and interest on securities of other issuers.

Let's say the enterprise is the parent company of another legal entity or has shares, bills, bonds of other issuers. In this case, you can claim part of the profits of these organizations in the form of:

— Insurance claims.

They are listed in insurance cases when insuring hazardous production facilities, property, as part of social and medical insurance.

— Budget subsidies.

They can be received by companies participating in various government programs, but do not forget about strict control of the intended use by the Treasury and the Accounts Chamber.

— Share contributions.

In this way, cooperatives receive initial and ongoing funds.

— Funds coming from associations, partnerships, unions, industry structures.

Governing bodies can issue funds to participants in various industry structures to finance common production programs.

Top 3 articles that will be useful to every manager:

• Financial control at the enterprise
• Net profitability of the enterprise
• How to build a company's financial structure

The optimal amount of net working capital

At first glance, a positive value of the NER indicator indicates that the enterprise is solvent. A negative value indicates an inability to repay obligations on a timely basis.

The optimal value depends on several factors:

• industries;
• duration of deferment under contracts with suppliers and customers;
• presence or absence of loans;
• sales volume.

There is a simple rule that is not written down anywhere, but follows from what we talked about above: the structure of current assets must be carefully analyzed. The value of the NSC should ideally be such that low-liquidity assets are fully covered by free, highly liquid working capital. For example, if work in progress and deferred expenses amount to 20% of the amount of current assets, then the following condition must be met:

Short-term liabilities and working capital

The relationship between a company's current liabilities and the amount of working capital is inverse. In other words, the greater the value of the company's current liabilities, the less the amount of its own working capital .

Section 5 of the balance sheet “Current liabilities” includes 5 positions. Short-term interest-bearing loans and borrowings require the greatest attention from the company's financial service. Their servicing requires the greatest possible accuracy, and any late payments on them entail losses for the company in the form of penalties imposed on it according to the contract.

Unpaid debt to contractors or employees can also cause quite significant financial losses. So:

• Delay in payment of wages may result in the need to incur additional expenses to pay compensation to employees. The Labor Code of the Russian Federation stipulates that its size must be at least 1/300 of the discount rate of the Central Bank of the Russian Federation, and the maximum can be limited only by the conditions specified in the company’s collective agreement. Such payments will increase the enterprise's unproductive costs, and as a result there may simply not be enough financial resources to maintain the technological process.
• Violation of tax payment deadlines or errors in determining their amount also entail the imposition of fines and increased losses for the company.

All such risks must be regularly assessed and measures taken to prevent losses.

Uncontrolled growth of short-term debt leads to an increase in the need for cash, which directly affects the lack of resources to ensure the company’s current operations and reduces the size of its working capital .

In addition to the above formula, there is another algorithm for determining the amount of own working capital using other balance sheet indicators. It also needs to be considered in more detail.

Return on net working capital ratio

As we remember, profitability is always calculated based on net profit and shows how much of the profit falls on one monetary unit of a specific indicator. In our case, this coefficient determines how much profit each ruble of investment in net working capital brings:

\[ RNWC = PE / NWC * 100\%,\ where \]

​\( PE \)​ – net profit.

Let's calculate this index based on the data in our example, taking the net profit value to be equal to 17,115 thousand rubles:

​\( RNWC = 17115 / 40320 * 100\% = 42.45\% \)​.

That is, every 100 rubles invested in NWC brings 42 rubles. net profit.

If the ratio grows, this indicates that both profit and working capital are growing. A decrease in the index, accordingly, indicates a drop in sales volume and a shortage of funds.

Let's compare

Having examined in such detail the fixed and working capital of an enterprise, we can compare them. The main difference between fixed capital and working capital is as follows.

Working capital (labor items):

• consumed immediately, in one production cycle;
• lose their shape during the production process;
• their cost is fully included in the price of the product.

Fixed capital (implements of labor):

• are used in production many times;
• they gradually lose their natural shape;
• the cost is “given back” in parts into the cost of production, with each new production cycle.

Briefly

• The fixed and working capital of an enterprise, together with labor resources, constitute the elements of the production process. The most important differences between fixed and working capital are as follows: the first is used in production many times, loses its shape gradually and transfers value to finished products just as gradually; the second is used once, immediately changes or loses its original shape, and its cost is included in the cost of the product in full.
• The structure of both types of capital depends on the specifics of production, market sector and other factors significant for a particular enterprise. In relation to working capital, they strive to use it more quickly, and fixed capital in the conditions of scientific and technical progress requires more intensive depreciation. The owner strives to recoup its cost even before the onset of physical and (or) moral wear and tear.

Comparison of the obtained indicator with its optimal value

As we have already said, the optimal NER value is individual for each enterprise. In general, PSC should cover low-liquid assets. In other words, even if the NER value is positive, this does not yet indicate high profitability: yes, the company is able to cover current obligations, but does not have reserves in case of an unfavorable situation.

For example, a key supplier decided to increase prices (and it is a monopolist in the industry). Whether there is enough money to pay for raw materials on time depends precisely on the profitability of the PSC and, of course, its structure.

Everything is clear about a zero or negative value: if the company was created recently, then this situation is absolutely normal. But if the net working capital is zero or negative for a company that has been operating for more than one year, this indicates that the activity is unprofitable and there is a risk of bankruptcy.

Too high an NER may result from:

• additional issue of securities;
• recently received a large loan;
• irrational use of resources (for example, a company purchased a large batch of expensive goods and cannot sell them - the goods lie in the warehouse as “dead weight” for a long period).

Characteristics of the equity capital of a commercial company

Any type of entrepreneurial activity requires the availability of a certain amount of own funds at the initial stage. As a rule, it consists of founding contributions from one or more business owners in the form of cash, capital goods, cars and real estate. All the company’s work is subsequently built on their basis, since without material support it would simply be impossible. At the same time, each type of asset has a different degree of return during use and can be sold over different time periods.

Let's assume that the production of plastic containers was chosen as a business direction. For this, there are the necessary machines and production areas have been allocated. However, without the availability of free funds in the current account and in the cash register, it will not be possible to purchase raw materials, materials, pay for the services of qualified workers, and the idea will not be able to be implemented.

How to get the necessary amount of money for a successful start and subsequent maintenance of production? There are quite a lot of options:

• obtain a loan at interest from a credit institution;
• borrow from a more successful friend;
• sell off existing “extra” property.

This list does not exhaust all possible options, since human ingenuity is limitless and the emergence of new ideas on how to acquire money is quite possible.

Working capital is necessary to maintain the going concern of a company. It advances it even before receiving the first incoming cash flows at the initial stage and helps to ensure further continuous circulation of materials and resources in production, trade, agriculture or services. Calculating the amount of working capital gives the entrepreneur information about his business capabilities, his ability to maintain business processes at the proper level, without unforeseen delays and stoppages.

Standard value of net working capital

To determine the standard (optimal) value of NSC, working capital should be classified according to the degree of liquidity. Let me explain this using our example.

Based on the specifics of the company’s activities, we classify as liquid assets:

• stocks;
• cash;
• financial investments;
• accounts receivable in the amount of 50%.

And let's calculate their sum:

\[ LA = 34077 + (31041 / 2) + 10500 + 4090 = 64187.50\ thousand rubles. \]

Now let’s calculate the cost of low-liquidity working capital:

\[ 85148 – 64187,50 = 20960,50. \]

This value is less than the NER value, therefore, the control ratio is met and the enterprise is considered solvent.

Structure of the basic formula of own working capital

The main source for calculating the amount of own working capital are certain balance sheet items. In the example discussed above, the most general formula for own working capital :

SOK = OA – TP,

where: OA - current assets;

TP - current liabilities.

The given elements of the formula fully correspond to sections 2 and 5 of the balance sheet. Section 2 contains only 6 positions corresponding to the most liquid part of the company's property. Liquidity should be understood as the ability to quickly sell existing assets and receive cash in return.

According to this criterion, current assets can be divided into groups:

1. Absolutely liquid. Cash in accounts, short-term deposits, demand deposits. These assets do not require additional time for implementation, but can immediately be used in the process of economic activity as a means of payment. You can dispose of them by simply filling out the necessary documents on the appropriate form for the bank. Their main distinguishing feature is that no additional time is needed to convert them into cash.
2. Liquid. This may include inventories, balances of finished products in the warehouse, accounts receivable and input VAT, and other assets. They are a little slower to transform into cash and require some effort and time to implement. At the same time, when hard times come, they can help pay off debts in a timely manner.

All specified types of assets are included in the 1st part of the formula for calculating own working capital . The second part of the formula reflects short-term liabilities. Let's look at them in more detail below.

Indicator optimization

We have analyzed the full structure of PSC, but still the answer to the question: what relates to the definition of net working capital, one always comes - money. It is money, not valuables, not some unreimbursed taxes or insurance contracts, the costs of which will be taken into account later. The main function of a PSC is the ability to quickly convert assets into cash. The shorter the turnover cycle, the higher the profitability of the business and the more efficiently the working capital is used.

But what to do in modern conditions, when most counterparties require deferred payment, and purchasing goods in small quantities is unprofitable? Here are the steps you should take to optimize your net working capital:

1. Maintaining a balance of inventory items sufficient to fulfill obligations to counterparties in the short term. Here the period is meant to be a month or a quarter. It is not practical to keep a year's worth of supplies in warehouses, even if the goods do not deteriorate.
2. Low liquid assets should be written off or sold if possible.
3. Work to optimize supplies. Logistics is a very important link in the production cycle, the operation of which largely determines the rate of capital turnover. Supply chain management should be organized in such a way that your own or hired transport is used as efficiently as possible. Efficient - this does not mean that you need to load the car to the maximum. A sufficient number of vehicles should be maintained so that drivers are provided with work during the day and there are no delays in deliveries. It often happens that they save on logistics by using one or two cars, and this is the reason for customers leaving.
4. If there are not enough working capital, you should use tools to replenish them: short-term loans (the most suitable option is overdraft), factoring. It also makes sense to review the terms of contracts and establish a minimum deferment or prepayment where possible. This is especially true for customers who purchase products in small quantities: a delay of 45 calendar days for such customers is not the right decision.
5. Accounts receivable classified as doubtful must be written off promptly. Let me remind you that writing off such debts as expenses is allowed after the expiration of the statute of limitations, which is three years.

Main capital

The production process, in addition to the labor of the labor force employed in it, occurs with the help of means of labor and objects of labor. Fixed capital is classified as means of labor. These are machines, equipment, devices, etc., necessary in production. Means of labor, influencing objects of labor (raw materials, materials, etc.) with the participation of the human factor, create products. Means of labor, if we talk about fixed capital in the form of buildings and structures, also create conditions for the production of products.

How to conduct an inventory of fixed assets ?

The structure and composition of fixed capital depend on the specifics of production and the market sector to which the enterprise belongs. An agricultural enterprise and an industrial enterprise will have a significant difference in the composition of fixed capital. Industry characteristics (crop production, livestock production, industry), the size of the enterprise, the composition of products and many other factors also play a role. Fixed capital is structured depending on the purpose of the study.

The most commonly used characteristics are the following:

1. Production and non-production facilities. They differ in their use in the production cycle or for the purposes of cultural and consumer services for enterprise employees. Example: a workshop building is classified as production assets, and a club building on the balance sheet of the enterprise is classified as non-productive.
2. Movable and immovable property. Example: a plot of land is real estate, and machines are movable property.
3. Role in production. Here we are talking about whether the property is directly involved in the production process or creates conditions for it. Example: equipment directly, actively participates in production, and the workshop building participates passively, creating conditions for work.

What are the ways to replenish working capital ?

Classifications are also used:

• by type (indicating the share of each type, example: separate buildings, structures, equipment);
• technological (similarly, the share of a separate subgroup within a group, example: the share of special vehicles in the vehicle fleet);
• structure based on time of use (so-called age), etc.

Having studied the composition and structure of fixed capital, we can come to the conclusion that it is used in production many times, while being subject to wear and tear. Depreciation expressed in monetary terms is called depreciation. This value is included in the cost of manufactured products. The basic concepts when calculating depreciation are the original cost and the depreciation rate. At the same time, in accounting and tax accounting, methods for calculating depreciation may differ.

In both types of accounting, there is a linear method for calculating depreciation, which is most often used in practice. The calculation is carried out according to the formula A = Ps * Na , where Ps is the initial cost of the object, and Na is the depreciation rate. In this case, Na = 1/n * 100%, where n is the number of months of useful use of the object, determined according to the Classifier approved by the Government (Regulation No. 1 of 1/01/02).

Besides this method:

• in NU they use nonlinear (only for certain groups of objects, in accordance with Article 259.2 of the Tax Code of the Russian Federation, clause 5);
• in BU they use the reducing balance method in proportion to the useful life, in proportion to the volume of production (PBU 6/01 clause 18).

Accelerating depreciation factors may be applied.

Owners of fixed capital strive to ensure that its value is repaid until it wears out physically (actual unsuitability for further use, loss of useful properties) or moral, cost (loss of value due to progress, the creation of new equipment).

Technological progress leads to the need to legislate accelerated methods and standards for depreciation of equipment and machinery. Depreciation periods are reduced.

On a note! In addition to the term “fixed capital”, the concepts of “fixed assets” and “fixed assets” are used as synonyms in accounting. The terms “working capital” and “working capital” are used similarly.

How to properly manage the CSC

The main objective of net working capital management is to minimize all risks arising from changes in the size of inventory and accounts receivable.

Here's a simple example. Surely many of you have come across such a fact as the lack of the goods you need in the store’s warehouse. For example, there are no clothes in your size or a piece of furniture that fits your space. In such cases, you are offered to order the necessary item, but its production or delivery will take some time. Often these deadlines are delayed due to logistics problems and other management errors. On the one hand, it is clear that it is not profitable for the company to stock the warehouse with all sizes in large quantities, but on the other hand, not every client will want to wait. Thus, competent regulation of inventory and reasonable waiting times for orders form the basis of PSC management.

In addition, you should understand from what sources working capital is financed. These sources are divided into internal and external.

Internal sources include sales income, profit, authorized capital, as well as other income (not related to core activities). These include income from the sale of the same illiquid inventories, interest received on debt obligations, etc.

Goals for determining the company's own funds

Having calculated the amount of your own working capital, you can first of all determine how much of your own funds is allocated to servicing current assets. In this case, the indicator obtained in this way can take on both positive and negative values ​​or be equal to 0.

If the amount of current assets is less than 0, this indicates the poor financial condition of the company, since the funds available to it are not enough to repay even short-term debts. In the event of minimal market turmoil, it may find itself in an unenviable position.

What are the reasons for this state of affairs? They can be completely different:

• low level of asset management in general;
• excessive passion for investing in non-current assets, in particular in unfinished construction;
• a significant increase in buyer debts;
• lack of profit (asset growth) for a long time;
• other reasons.

An excessively high value of the amount of own working capital should also not be perceived as a positive phenomenon. An excessive value indicates inefficient use of the company's assets. This may be expressed, for example, in attracting bank loans in a larger volume than necessary, or in thoughtless use of net profit. of working capital equal to 0 in newly created companies or firms that actively attract credit resources for current activities.

By regularly examining the level of its own working capital , the company can promptly influence it in order to maintain its optimal value. Measures that improve working capital parameters include:

• reducing material balances in warehouses;
• timely control over the collection of receivables and avoidance of delays.

The list of possible actions is quite wide and should be applied by managers depending on the specific situation based on detailed information about the structure of assets and liabilities.

***

Based on the balance sheet data, you can calculate the amount of your own working capital as of a certain date. For this, there are 2 formulas, each of which gives the correct result, but when using different reporting items. The final amount of calculations fully characterizes the amount of funds allocated for the current financial servicing of the company’s current assets and maintaining its basic detail.

In the process of studying the state and total size of one’s own working capital, one can evaluate the results of its use and develop measures to improve its structure, areas of use, and find ways to increase or, conversely, decrease to the optimal level.

Examples of calculations in Excel

Let's calculate net working capital, turnover ratio, as well as the optimal value and change in NER for PJSC Megafon using the formulas given above. We will take the initial data from the financial statements for 2021.

So, what were the results? It is obvious that the company is experiencing a shortage of working capital and is very dependent on creditors. Highly liquid assets (highlighted in green) in 2019 accounted for approximately half of the value of working capital, while low-liquidity assets (highlighted in pink) accounted for only 15%. However, net income fell sharply compared to 2021, while revenue remained flat. Accordingly, the profitability ratio of PSCs also fell. The turnover ratio decreased insignificantly, because the amount of debt has changed slightly.

What conclusions should be drawn? In general, the company is on the right track in terms of changing the structure of working capital. The very first thing to do is to reduce the amount of loans and debt obligations to suppliers. It may also be worth thinking about investments - in 2021, returns from investment activities were much higher. This can be seen in the amount of financial investments and in the “Other income” line of the income statement.

Working capital strategies

To finance the working capital of an enterprise, one of the following strategies can be used:

1. Cautious.
   In this case, most of the company's assets are presented in the form of cash, inventories, and securities with good liquidity.
2. Restrictive.
   Assets include a minimum amount of cash, securities and receivables. This strategy has its drawback: to cover the variable part it is necessary to create large accounts payable.
3. Moderate.
   This is an intermediate option between the first two strategies. At some points, the company may have excess current assets, but they are considered a payment for maintaining a normal level of liquidity.

When choosing one of the financing strategies, it is necessary to understand how clearly the supply and sales processes are defined:

• For clearly planned supplies and sales, when costs, volume, payment terms and other indicators are known in advance, a restrictive strategy is suitable. Any other principle of operation in this case may cause an increase in the need for external sources of financing without a parallel increase in profits.
• If it is not possible to accurately determine the volume of supplies and payment terms, it is better to opt for a cautious strategy. In some cases, a restrictive approach is allowed here, but it requires the formation of an insurance reserve of funds.

Let's compare different strategies for raising funds for the cost of financing working capital in terms of the risk of shortage and the amount of financial resources contained in these funds without movement (see Table 1):

Table 1. Comparison of the risk of shortage of working capital and the volume of financial resources for various strategies.