The amount that reflects the difference between the company's current assets and its short-term liabilities is called its own working capital. The balance sheet formula for calculating your own working capital is elementary and allows you to easily find out your working capital. It is only important to take a responsible approach to calculations in order to correctly determine the degree of your own solvency.
Formula for calculating a company's own working capital
Regularly determining its own working capital in the balance sheet is necessary for every organization that cares about its financial condition and regular increase in profits. This is necessary not only to give the organization financial stability, but also to always be able to assess the financial prospects of the company, making the necessary adjustments. Also, by calculating your own working capital, you can assess the chances of getting rid of all existing short-term liabilities by selling current assets.
The formula for the balance of own working capital is as follows:
[Current assets of the company] – [Short-term liabilities] = [Own working capital]
This is a general formula that allows you to quickly obtain the necessary information and coordinate the vector of further development of the organization, depending on the data received. This formula is also suitable for calculating funds on a new balance. In this case, you can calculate your own working capital in the balance sheet according to the line:
= [line 1200] – [line 1500]
Moreover, if you do not have any information necessary to carry out calculations, there is a second formula that allows you to find out the necessary data. It is also suitable for both old and new balances:
[Own working capital] = ([Equity of the organization] + [Existing long-term liabilities]) – [Non-current assets]
[Own working capital] = ([line 1300] + [line 1530]) – [line 1100]
As an example, we can imagine a conditional company and assume that its short-term liabilities total 5,360 rubles, and its current assets equal 7,500 rubles. In this case, the organization’s own working capital will be 7500 – 5360 = 2140 rubles. This is a positive indicator, indicating that current assets exceed short-term liabilities, which means that the financial viability of the company allows it to confidently move into the future.
What indicator of own working capital is considered normal?
Using the formula for the maneuverability of your own working capital on the balance sheet allows you to obtain the necessary data, but it is also important to understand exactly what value can be considered good, because you can get both a positive and a negative figure.
- A normal indicator is considered to be a positive value of the company's own working capital, indicating that current assets exceed the amount of short-term liabilities. This indicates to the organization's leaders that they are moving in the right direction and the company can continue its systematic development.
- If the indicator is negative, then this does not show the company in the best light. For the most part, a negative value of own working capital, especially if it turns out to be such on a regular basis, will lead to the collapse of the company and complete bankruptcy. However, there are a few exceptions, including fast food restaurant chains. Companies such as McDonald's have a negative working capital ratio, but they not only do not stop operating, but also manage to continue to develop. The thing is that in such organizations the transformation of existing reserves into net profit occurs very quickly, due to which the negative value is completely covered.
If you have negative data that does not have any insurance in the form of regular quick profits, then you should seriously think about it.
Further analysis of the company's own working capital
If in the first stages of a company’s formation it is enough to obtain positive values of its own working capital, then in the future the calculation of own working capital in the balance sheet line by line should be compared with the reserves available in the company. The fact is that existing reserves are the least liquid part among all the organization’s current assets, which means that their financing should be carried out precisely at the expense of the company’s own funds or, in extreme cases, at the expense of long-term borrowed funds.
DEFINITION
Own working capital represent working capital, which includes the amount of excess of the enterprise's current assets over its short-term liabilities. This indicator is used when assessing the capabilities of companies in calculating short-term liabilities in the event of the sale of all their current assets.
The company's current assets represent the monetary value of:
- working capital (raw materials, fuel, components);
- circulation funds (finished products, goods shipped but not paid for).
Using your own current assets, you can determine the degree of solvency and financial stability of any enterprise.
Formula for own working capital on balance sheet
The formula for own working capital on the balance sheet requires balance sheet data, which is the main source of information for analyzing the activities of any organization.
The general formula for own working capital on the balance sheet is as follows:
CoC = OA – KO
Here CoC is own working capital,
OA – the amount of current assets,
KO – the amount of short-term liabilities.
If you use the new balance sheet, then the formula for own working capital on the balance sheet looks like this:
CoC = line 1200 – line 1500
The same value can be determined in a second way:
CoC = SK + DO - VA
Here SK is the amount of equity capital,
VA - non-current assets,
TO – the amount of own liabilities.
Based on the balance sheet lines, this formula looks like this:
Standard indicator of own working capital
The indicator of own working capital of any company can be positive and negative:
- According to the standard, the indicator must be a positive value, which means that current assets are greater than short-term liabilities.
- A negative value of the indicator of own working capital characterizes the company from the negative side. True, there are exceptions when successful enterprises operate with a negative value of their own working capital indicator (for example, McDonald's, where this ratio is covered by a very fast cycle of converting inventories into revenue).
When analyzing the indicator of own working capital, it must be compared with the value of the enterprise's reserves. During the normal functioning of the enterprise, the indicator should not only be positive, but also be greater than the amount of reserves. This can be explained by the fact that inventories are the least liquid part of working capital, so they must be financed from own funds or funds raised for long periods.
Examples of problem solving
EXAMPLE 1
| Exercise | The enterprise worked with the following indicators for 2015 and 2016 Own capital (line 1300) 2015 – 258,000 rubles, 2016 – 286,000 rubles. Non-current assets (line 1100) 2015 – 148,000 rubles, 2016 – 172,000 rubles. Current assets (line 1530) 2015 – 250,000 rubles, 2016 – 270,000 rubles. Determine the indicator of own working capital on the balance sheet and compare the indicators for two years. |
| Solution | The formula for own working capital on the balance sheet to solve this problem: CoC = line 1300 + line 1530 – line 1100 CoC (2015) = 258,000 + 250,000 – 148,000 = 360,000 rubles CoC (2016) = 286,000 + 270,000 – 172,000 = 384,000 rubles Conclusion. We see that the company's own working capital tends to increase, which indicates an increase in its efficiency. |
| Answer | CoC (2015) = 360,000 rubles, CoC (2016) = 384,000 rubles. |
Current assets, funds, and capital are taken to be the totality of circulating production assets, as well as circulation funds, expressed in financial terms. These indicators as part of working capital perform different functions in the process of production activities of the enterprise. The former are responsible for the area of production, the latter for the area of circulation. What is the composition and structure of working capital, how to identify your own working capital, what you need to know about them - we will consider below.
This indicator is present in the balance sheet. It acts as an advance amount in the complex of material assets of the enterprise, which is intended to serve the economic process. Working capital is fully realized during one operational or production-commercial cycle. Thus, the working capital of an enterprise is the capital necessary for the rational formation and use of production assets in their minimum required volume. Through their use, the organization implements the established plan for the selected period.
Working capital assets are the part of the means of production that are fully consumed in each cycle and fully transfer their value to the manufactured products. Accordingly, they are fully reimbursed as a result of each production cycle.
Working production assets can be classified in the following areas:
- Inventories for production. This includes the main resources that are used to produce products. These are raw materials, materials, semi-finished products and components, fuels, packaging, spare parts that will be required if repairs are necessary. In addition to all of the above, this category includes items that wear out quickly and are of low value, that is, those that have a service life of less than one year. This category includes specialized devices, tools, as well as replacement equipment, work clothes and shoes.
- Semi-finished products produced by the company and work in progress. Work in progress includes products and goods that are subject to further processing.
- Expenses for the future period, that is, investments that will be required to develop new equipment or products. This may include paying rent for some time in advance. This is the only non-material category that relates to production assets.
Circulation funds are also classified as working capital. These include:
- Remains of finished products stored in warehouses.
- Products and goods that have already been shipped and delivered, but have not yet been paid for by customers.
- The amount of balances in accounts receivable, a real bank account, in cash, in settlements, as well as financial investments in securities.
The ratio of individual constituent elements in working capital to their total value characterizes their structure. This is the ratio between different elements, which is expressed as a percentage of the total.
Also, working capital in the balance sheet can be classified into own and equivalent assets, as well as borrowed assets. The first include those that were allocated by the founders of the organization for the continuous functioning of production. The main sources of own working capital are profit, as well as financial on-farm resources.
Working capital equivalent to own are those funds that do not belong to the enterprise, but, according to the operating conditions, are constantly in its circulation. They can also be called stable liabilities. This category includes the minimum salary arrears to employees, accruals, and reserve funds for future payments.
Borrowed funds are those finances that are obtained by an organization from the outside through loans and borrowings.
Working capital cycle
The productive assets of the circulation fund are constantly in motion. This ensures continuity of funds circulation. We can say that working capital acts as the most moving parts of assets. In each circulation, working capital goes through three stages:
- Monetary. This is the initial stage at which the enterprise’s investments are used to purchase materials, raw materials, fuel, packaging, semi-finished products, as well as all other necessary elements for the implementation of production activities.
- Industrial. At this stage, all of the above resources are converted into finished products, as well as work in progress.
- Commodity. The last stage includes the process of selling products, and as a result, receiving funds as payment.
During the process presented, continuous changes are made to the advance cost format.
Rationing of current assets
Rationing of working capital is the basis for the rational use of the organization’s economic assets. The main task of rationing is the development of reasonable standards and norms for spending funds. This is necessary to ensure regular minimum stocks, which make the operation of the enterprise uninterrupted and problem-free.
The composition and structure of the enterprise's working capital distinguishes between regulated and non-standardized funds:
- Standardized are current assets that are classified as inventories.
- Non-standardized - finances, cash, shipped products from this work, all types of accounts receivable, etc.
For an optimal approach to standardization, three key methods are used. This is an analytical approach, a coefficient approach, as well as a direct counting method.
- Analytical. To implement this method, actual data on the volume of working capital for a certain period is used. At the same time, excess and unnecessary stocks are clarified, production conditions are analyzed, as well as supply. The result of the presented calculation acts as a standard for current assets for the forecast period. This technique is optimal if there is no need for significant changes in the functionality of the organization.
- Coefficient. In order to implement this methodology, amendments are made to the standards of the previous period for the planned period. Corrections are made using coefficients. The presented coefficients take into account changes in the turnover of production volumes and sales of products, shifts in the product line, as well as other factors.
- Direct counting method. To apply this method, the amount of working capital is calculated for each specific type of product, as well as inventory. After which they are summed up, and it becomes possible to determine the standard for each individual element.
Rationing allows you to determine the minimum reserves of necessary inventory items. Typically, this happens for a certain period of time. In general, this is necessary to identify the minimum amount of funds required.
Working capital in the balance sheet: line and formula
The standard determination of a company's own working capital is by subtracting current liabilities from the company's assets. The regulations were established by order of the Federal Bankruptcy Administration dated August 12, 1994, number 31-r. According to him, the formula will look like this:
[Own current assets] = [Company assets] – [Current liabilities]
[Own current assets] = [line 490] - [line 190]
However, in 2011, some changes were made to the calculation procedure. In particular, the formula used to determine own current assets has also changed. Now to get the indicator you will need to do the following:
[Own working capital in the balance sheet] = [line 1200] - [line 1500]
Carrying out such calculations will help you find out the latest information on the data. In addition to the formula outlined above, you can use another simple option. Based on it, current assets in the balance sheet are line 1300, which is added to line 1530, from which line 1100 is subtracted.
Share of working capital in assets
The share of working capital in the company's assets demonstrates the ratio of working capital to the total assets of the organization, including external working capital. In order to calculate this indicator, the formula is used:
[Share of working capital] = [the amount of the organization’s current assets as of the period] / [the cost of all assets for the period]
In order to identify the first indicator, you will need to add up the data written in the following lines of the company’s balance sheet:
- 1240 financial investments.
- 1250 cash of the organization, its equivalents.
- 1210 organization reserves.
- 1220 VAT on purchased valuables.
- 1230 amount of accounts receivable.
- 1260 other assets that can be classified as current.
The organization's statutory policy may regulate the exclusion from the amount of current assets of long-term receivables, as well as non-liquid receivables, that is, those that may not be paid in the future. The second indicator for the formula is taken from the balance sheet. It corresponds to the indicator reflected in line 1600.
Since the share of working capital in assets is a value that needs to be calculated, its standard value will depend on a number of factors. These are the specifics of business processes, characteristics of the market segment, the level of competitiveness of the enterprise, its size and scale of production. In most cases, the proportion of 50% or higher will be positive. Another favorable factor is the growth of this share when analyzing dynamics. The higher the share ratio, the more liquid the organization’s assets can be called. Accordingly, the more solvent the organization becomes in terms of payments on short-term debt obligations. The presented indicator may be important not only for the founders of the enterprise, but also for future creditors and possible investors.
Average annual value of current assets
The total total cost is based on balance sheet line 1200. It contains the value of the company's cash balances for each position at the beginning of a given period, as well as at its end.
The average annual cost is calculated using a formula and analyzed depending on the purpose of the study. For example, such analytics may be required if it is necessary to determine the size of the balance of property as a whole, or for each individual item. It helps to identify the dynamics of asset values, as well as draw conclusions about the state of working capital. It is used to calculate the following indicators:
- Return on working capital. Return on working capital is the amount of profit that is received for each ruble invested in the purchase of materials for production and direct production.
- Working capital turnover. Asset turnover helps to identify the level of efficiency of their use. This is the duration of the full cycle from the moment of acquiring resources for production to the period of sale of finished products.
In addition to the turnover itself, the duration of one turnover in days is also calculated. The formula used for this is:
[Duration of turnover in days] = [Number of days in the period] * [Average amount of working capital balances] / [Profit from sales of products]
If the duration of one revolution decreases, this indicates that the use of working capital has improved.
If you need to calculate the average annual cost of a certain type of property, for example inventory, you need to refer to the corresponding line in the balance sheet. The formula for the average annual cost of working capital is as follows:
[Average annual amount of current assets] = ([Amount of working capital at the beginning of the period] + [Amount at the end of the period]) / 2
Working capital of the enterprise and non-current assets
A thorough analysis of the company's current position requires an assessment of not only its own working capital, but also non-current assets. Non-current assets are those funds? who do not take part in the production processes. However, without their participation, no organization will be able to exist in the market. These include the following:
- Financial investments for a long period of time.
- Deferred tax assets.
- Fixed assets of the company, that is, buildings, structures, equipment, etc.
- Other intangible assets of the organization.
- R&D results.
If we make a simple assessment of non-current assets, we can say that they are buildings with structures and production premises, as well as warehouses, the land on which they are located, and the machines with which production is carried out. Why are the presented entities called non-current assets? The reason is that they are stable. For the most part, they are not undergoing any large-scale reorganization. At most, this could be repairs or minor reconstruction work. However, among a number of similar assets there are categories that are characterized by low stability. These are equipment, equipment, machines, other technical accessories and units. Technical equipment is often subject to wear and tear - both physical and moral. Despite this, they still belong to non-current assets, because as a result of the production process they are not liquidated, but remain in their original form.
This is not the only difference between current assets and non-current assets. There are also the following differences:
- Lifetime. Non-current assets can be used for a period of one year until they are retired. Current assets last for one or two cycles.
- Specifics of application. The presence of the first or second category of assets is determined by the direction of specialization of the organization. For example, a high share of non-current assets can be observed in capital-intensive enterprises, and current assets in trading companies.
- Location in financial documentation. Non-current assets are located in the first section of the balance sheet, working capital in the second.
- Liquidity. Non-current assets cannot be called liquid. The reason for this is associated with the long period of their use. If the owner tries to sell them after use, he will be able to gain a small amount (this does not apply to real estate and land plots). Working capital has a high degree of liquidity.
- Credit obligations. Non-current assets often require long-term investment, while current assets pay for themselves very quickly: in one or two production cycles. It is much easier to attract credit funds for current assets.
The coefficient of their ratio will help to perform analytics on the financial stability of the enterprise, demonstrating the structure of non-current and current assets. They are calculated using the formula based on the data obtained from the balance sheet:
[Ratio coefficient] = [current assets] / [non-current]
[Ratio coefficient] = [line 1200] / [line 1100]
Using the presented coefficient, it is very convenient to control the capital structure of the organization, adjusting its optimal ratio.
Mobility and maneuverability coefficients
These ratios are also obtained by using working capital data
This indicator demonstrates how capable the organization is of maintaining the level of its own working capital and whether it can replenish working capital, if necessary, through the use of its own sources. Calculated using the following formula:
[Own funds maneuverability coefficient] = [Own working capital] / [Equity capital]
To calculate own working capital, line 1100 is subtracted from line 1300 of the balance sheet. Own capital is line 1300.
Working capital mobility coefficient
This indicator demonstrates the amount of ready-to-pay funds in the total amount of assets that are used to repay short-term debt obligations. The formula used for calculation is:
[Mobility rate] = ([Cash] + [Financial investments]) / [Current assets]
[Mobility rate] = ([line 1240] + [line 1250]) / [line 1200]
If the mobility coefficient increases, one can judge that the rate of property turnover is increasing.
An organization's equity capital refers to the totality of funds available to the company. Or rather, funds belonging to the participants of the organization. How is the amount of an organization’s equity capital determined based on the balance sheet data?
How to determine the amount of equity capital?
According to the balance sheet, the amount of the organization’s equity capital corresponds to the balance of line 1300 “Total for Section III,” i.e., the total amount for Section III “Capital and Reserves” of the balance sheet (Order of the Ministry of Finance dated July 2, 2010 No. 66n, clause 66 of the Order of the Ministry of Finance dated July 29, 1998 No. 34n).
Let us recall that the balance of capital and reserves in the balance sheet is determined as follows:
line 1310 “Authorized capital (share capital, authorized capital, contributions of partners)”
line 1320 “Own shares purchased from shareholders”
line 1340 “Revaluation of non-current assets”
line 1350 “Additional capital (without revaluation)”
line 1360 “Reserve capital”
line 1370 “Retained earnings (uncovered loss)”
It is from the organization's own capital that dividends are paid to participants. And upon termination of the organization’s activities, the size of its equity capital will show the amount of funds that is subject to distribution among participants. However, it is necessary to understand that equity can also be negative. This is possible in the case when the organization operates at a loss and its accumulated value exceeds the sum of other elements of equity capital (authorized, additional, reserve capital).
We talked in more detail about accounting for an organization's equity capital in a separate section.
Please note that if the calculation of equity capital is carried out to determine the maximum amount of interest taken into account in expenses on controlled debt, then the amount of equity capital will be equal to the sum of the balance of line 1300 and debts on taxes and fees (
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