21. The efficiency of working capital management in enterprise.

Working capital is the capital invested by firm, the company in the current activity on period of each operational cycle. Differently, it means of the firm enclosed in the current assets. Working capital, as well as fixed capital, expresses the certain relations of production developing with development of business. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Also called net current assets or current capital. Current Assets - Current Liabilities = Working Capital. Working capital directly participates in creation of new cost, functioning in the course of a circulation of all capital. The ratio of the fixed and working capital influences size of received profit. Working capital addresses quicker, than fixed capital. Therefore with increase in a share of working capital in total amount of the advanced capital time of a turn of all capital is reduced, increases possibility of growth of new cost, i.e. arrived. Working capital management. Working capital management of a company has a great influence on the results of its financial and economic activities. On the one hand, a more rational use of current resources (it is primarily about optimizing inventory, reducing work in process, improving the methods of payment, etc..). On the other hand, now businesses have the ability to choose different options expensing the cost price, determining the proceeds from the sale of goods (works, services) for the purposes of taxation and others. Main goal of management of working capital is defining an optimum volume and structure of current assets, and also sources of their financing. For achievement of this purpose the manager should find a compromise between volume of current assets and risk of loss of liquidity. For liquidity maintenance the enterprise should have high level of working capital, and for profitability increase the enterprise should reduce stocks of current assets not to allow existence of not used current assets. Objects of working capital management are its main elements: 1) reserves (inventory management means determining the need for them, ensuring the sustainability of production and sales); 2) accounts receivables (accounts receivable management involves determining the policy of the credit and collection for different groups of customers and products, analysis and ranking of customers, depending on the volume of purchases, credit history and the relationship of the proposed payment terms; control of accounts receivable or deferred arrears etc.); 3) cash (cash management is done by forecasting cash flow). Working capital management solution includes major tasks such as: 1) Calculation of the minimum sufficient funds to advancing current assets for the purpose of uninterrupted and rhythmic work of the enterprise. This problem is solved by rationing of current assets. 2) development of accounting policies to optimize tax depreciation methods by selecting low value items, write-offs of inventory, determine the revenue from sales, etc. 3) acceleration of turnover of working capital at every stage of capital turnover. To solve these problems in the enterprise should be developed organizational, technical and economic measures to expedite the passage of each stage of the movement of current production assets and funds to obtain cash from customers. The acceleration effect results in a reduction in working capital. There are many reasons why a business will have working capital problems. As a business owner, it is critical for you to determine why the situation exists, and correct the problem immediately. So how do you determine why you would have working capital problems? Here is a short list of some of the usual causes of this issue. 1) Not enough sales, therefore not enough cash 2) Past due receivables are increasing 3) Customers are paying short, due to quality issues 4) Staff has been added to process orders and/or invoices 5) Detailed information on inventory not available 6) Inventory turnover problems 7) Interest incurred or late payment penalties from vendors 8) Overpurchasing. Threats and Common Pitfalls in managing working capital: - Failure to control cash by carrying too much stock, paying suppliers too promptly and allowing customers too long to pay; - Poor collection of debtor book such as greater than 45 days and increasing level of bad debts; - Rising work-in-progress that is not billed on time; - Purchase orders being made by expanding payment periods, not by cash; - Diminished cash balances and over-reached overdraft facilities. Borrowings being increased just to keep the business running; - The business widening its range of suppliers simply to make more credit available; - Rising stock levels and static sales; - Under-capitalisation; - Fatal leasing agreements; - Loss of financial backing; - Falling property values; - Too heavy reliance on grants; - The business is unsure how much it owes and how much it is owed.

22. Company’s current assests short-term and long-term financing sources – characterize a set of property of the enterprise serving current production-commercial (operational) activity and completely consumed during one production-operating cycle. Sources of financing can be divided to internal (own capital and amortization accumulations) and external (borrowed or involved capital). Current assets can be financed at the expense of issued securities, bank credits, state means, citizens. The advantage of self-financing is no interest payments; the company doesn’t depend on anybody. For external sources, these are disadvantages. Current Assets are mostly work in progress goods and Semi-finished inventories. Net working capital is the excess of current assets over and above the current liabilities. From the above definition it can be concluded that a part of the current assets are financed by a source other than the current liabilities. This source is long term finance. These sources are: 1. Spontaneous liabilities a) Accruals are liabilities covering expenses incurred on and prior to a specified date, payable at some future date. For example, if a company is following a policy of paying wages for every wage once per month, with the change in policy if the firm is deferring the payment of wages for three weeks. Thus, amount of accrued wages increases because of deferring the wage payments. b) Provisions are changes for an estimated expense. These provisions do not involve immediate cash outflow. Cash outflow occurs when the actual amount of liability is known and paid for. Examples for provisions are provisions for dividends, provision for taxes etc. 2. Trade credit - Trade credit is the credit extended by the supplier of goods and services. Trade credit is an important source for financing current assets. On an average, trade credit accounts for nearly 40 percent of current liabilities. The suppliers generally extend credit based on the financial soundness of the buyer and the relations between them. 3. Short term bank finance. The various ways in which the banks finance current assets are: a) Loan arrangement: banks credit the entire loan amount to the borrowers account. b) Overdraft arrangement: the borrower is allowed to overdraw on his current account with the bank up to a stipulated amount. c) Cash credit arrangement is similar to the overdraft arrangement. In this arrangement borrower can draw up to a stipulated limit based on the security margin. d) Bills purchased and bills discounted: this arrangement a banker purchases or discounts the bills generated during the credit sales of goods. The amount provided is usually covered by the cash credit and overdraft limit e) Letter of credit: banks help its customers to obtain credit from his suppliers, if the customer of the bank fails to meet the payment obligations, then the bank is liable to pay the amount on the due date. f) Note lending system. 4. Public/fixed deposits: The deposits mobilized from public by non-financial manufacturing companies. 5. Inter-corporate deposits: one company makes a deposit with another company, normally for a period of above six months. 6. Short term financial assistance from financial institutions. 7. Commercial paper. Working capital - financial resources of the enterprise invested in current assets. Current assets include: 1. Current operating assets - is part of the production assets of the enterprise, the material elements of which are in the process of production, in contrast to the fixed assets are consumed within one production cycle, and their cost is transferred to the product of labor all at once, and they lose their natural-material shape; 2. Circulating assets - is funds of the company set out in the sphere of circulation. Current operating assets include: 1. Inventories - are items of work prepared for the launch of the production process; 2. Work in progress and semi-finished products of own production - is a subject of labor, entered the production process: the materials, parts, components and products that are in the processing or assembly, as well as semi-finished products of own production; 3. Deferred expenses - is immaterial elements of working capital, including the costs of training and development of new products, which are produced in a given period (quarter, year), but are the products of the future period. Circulating assets consist of elements such as finished products in stock; goods in transit (shipped products); cash; funds in the calculations with consumers. In scope of a valuation current assets are classified into normalized (current assets in stocks of inventory) and unnormalizable (funds in settlements, cash on hand and in bank accounts). Formation of working capital occurs at the moment of creation of the enterprise. Authorized capital(share, unit) is formed for these purposes. In the future, working capital can occur owing to its own sources, enterprise received in the course of its activities, but mainly due to profits. Stable liabilities also serve as a source of working capital. This is the funds of company that do not belong to the company, but are always in the turnover of the enterprise (debt budget for advances, payroll, etc.). Other own funds may also be used as a source of working capital. This is temporary unrestricted balances of the reserve fund, special purpose funds. Short-term loans from banks can also serve as extra sources of working capital. Accounts payables are unintended source of working capital, represent essentially, an interest-free loan. Sources of circulating capital are own, borrowed and additional fund-raising. Sources of short-term financing: 1. Charges. Payments of a salary occur 1 — 2 time a month. Thus, in balance the sum added, but not paid salary is reflected. Business and with taxes similarly is. Charges can be temporarily used as financing sources, and is free. 2. The accounts payable for the goods, works and services — is the trading credit. Generally the enterprises make purchases on credit. This duty is considered in the form of accounts payable, or the trading credit. Accounts payable — the most powerful part of short-term debt making to 40 % of short-term obligations of the medium-sized non-bank enterprise. This share usually is more at small firms, in comparison with the large. The trading credit — is a spontaneous source of financing as its emergence depends only on made transactions. 3. Costs for receiving the trading credit. Sale on credit is usually carried out with granting the discount operating during short term whereas payment during the subsequent period of action of the credit is carried out for all-round price. The effective annual rate of percent of the additional trading credit at refusal of a discount is calculated so: [1 + discount interest / (100 - discount interest)] [360 / (A credit maturity date - Period of validity of a discount)] – 1; 4. Short-term bank loans are the second most important, after the trade credit, the source of short-term financing. The loan agreement is made by signing a promissory note or loan agreement, which sets out: the loan amount; the rate of interest; return policy - or the total amount payable by installments; provision of credit - deposit, which can be made, for example in the form of securities; various other conditions. When the obligation is signed, bank credits to the current account of the borrower the amount required and the balance of the borrower increases in the item "Cash" and the corresponding item of liabilities. 5. Credit line - a formal or informal agreement between the bank and the borrower, which determines the maximum amount of the loan that the bank can provide this client. 6. Revolving credit - a formal line of credit, often used by large enterprises. For example, an entity may enter into a contract with a major bank on autmatically renewable - revolving - credit for 500 million. KZT. In accordance with this agreement, the Bank is required for 4 years to provide loans to the company within 500 mln. KZT as soon as the need arises. In turn, the company is obligated to pay an annual fee for the undrawn portion of the loan in the amount of 1% of the unclaimed amount. In addition, of course, company will have to pay interest on the loan amount. 7. The price of bank credit. The cost of obtaining a bank loan can be different for different borrowers in the same time and in the same borrower at different times. Rate for the loan is usually higher for riskier borrowers, as well as for small loans. 8. Regular or simple interest for the loan is that the borrower receives the nominal amount of the loan and returns it with interest after a certain period. 9. Loan with the added interest - is a loan in which the interest payments and repayment of the principal are made in equal installments over the period of the loan. The percentage is calculated based on the nominal rate and added to the principal amount of the loan. Sources of long-term financing. Long-term financing in domestic practice represents an investment of means for more than a year. So long granting financial means demands reliable sources. Contrary to a popular belief that the most reliable financing is carried out on own account, in a case with long-term financing the attracted funds are considered as a more effective option. Long-term financing from external sources has its own advantages, first of all, that allows carrying out activity without risk not to finish it because of the termination of term of financing. Long-term financing can be received from several main external sources. 1. The first source – securities. Securities include all financial documents, capable to provide from the owner certain economic guarantees of obtaining the income in exchange on the means spent for purchase of these documents. There are some types of the securities most known of which are stocks. Stocks can be ordinary and preferred. Common(ordinary) stocks assign to their owner a share of authorized capital of the economic subject, in proportion equal to number of stocks available for it. Preferred stocks among other things, possess also the right of obtaining the fixed dividends. 2. Bonds and bills relate to securities . Unlike the stocks directly connected with profit of the company, the bond and the bill bring in to the holder the fixed income. It is in most cases lower, than profit on stocks. Long-term financing by means of securities is carried out by their issue, i.e. sale through the stock exchange, exposure to the auction, placements at several investors. 3. Also long-term financing can be involved at the receiving the bank credit. In this case, the entity (usually small and unincorporated) has at its disposal some free resources for a long period. To make the lender was able to expect the return of funds in due time, the loan agreement is signed. The borrower should provide one of the possible forms of safeguards. Most often property of the borrower is a collateral provided by the lender. 4. Long-term financing in certain cases is provided by means of leasing. Internal long-term sources of financing. The reserves saved up by companies - profit and the saved up depreciation charges become such sources of financing of activity of the companies. However use of internal means for long-term financing is possible only in very large companies, financial and industrial groups which have necessary volume of temporarily free own means. Also the means received from the budget on an irrevocable basis within the limits of various programs concern internal sources of long-term financing, and also insurance compensation. External long-term sources of financing. In a role of such sources act: - Bank credits; - Nonbanking tools when necessary company's resources are received by placing of bonds and stocks; - The means given from the budget on a returnable basis; - The means received from other legal bodies. Long-term funding implies that the company refuses part of the profits today, putting it in its own development, in the hope that these investments will provide a much greater return on investment. With this feature, long-term financing linked with some of its risks. To make assess the riskiness of investments for the long term, the notion of operational and financial leverage is used, as well as various factors of the stock market. How effective long-term sources of finance, how big is the risk of insufficient return on long-term investment in the company - the answers to these questions can provide a financial analysis of the company and forecast of its development for the next few years. Such analysis, which the company provides may not have 100 percent accuracy, since it requires accounting many factors, including unpredictable, however, allows a certain degree of approximation to increase the effectiveness in the long term development of attachment.