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Gross current assets characterize their overall volume formed from both own and borrowed capital.
Net current assets (or net working capital) characterize the portion of their volume, which is formed due to own and long-term debt capital.
Amount of net current assets (net working capital) is calculated as follows:
NWC = CA – CL, (1.1.1)
where NWC - net working capital, CA – total current assets, CL – current liabilities.
Own current assets that characterize their part, which is formed with equity capital of the enterprise.
Amount of own current assets of the business is calculated by the formula:
OCA=CA – LD – CL, (1.1.2)
where OCA – own current assets, CA – total current assets, LD – long-term debt, CL – current liabilities.
Consider now types of current assets. On this basis they are classified in the practice of financial management as follows:
Inventories of raw materials and intermediate products. This type circulating assets characterizes the volume of input material flows in the form of stocks, providing productive activities of the enterprise.
Stocks of finished products. This form of circulating assets is usually added to the volume of work in progress (with an assessment of the coefficient of its completeness for particular products in general).
Often in the literature on financial management stocks of raw materials and finished product inventories are combined into a group of "inventories". Effective inventory management makes it possible to reduce the duration of the production and the entire operating cycle, reduce the level of current costs of storage, reduce transaction costs for their purchase, free from the current economic turnover part of funds, reinvesting them in other assets.
In the process of inventory control there should be already included measures to accelerate their integration into direct operational process (manufacture or sale). This ensures release of part of financial resources, as well as reduction of the size of losses of inventory in the process of their store.
Current receivables. Under the current accounts receivable are understood debts of businesses and individuals of certain amounts of cash and cash equivalents to an enterprise, which occurs during the normal operating cycle or provided to maturity in a period of one year. It characterizes the amount of debt in favor of the company, estimated for the goods, works, services, issued advances, etc.
The largest volume of current receivables of enterprises falls on receivables for goods, works and services. Effective management of current accounts receivable is connected first of all with the optimization of size and provision of customers debt collection for goods and services.
Cash assets and their equivalents. These include not only cash balances in national currency (in all its forms) but also short-term highly liquid investments, freely convertible into cash and characterized by insignificant risk of changes in value.
Management of cash assets or the balance of cash and cash equivalents, being constantly at the disposal of an enterprise, is an integral part of the functions of general management of current assets. The size of the balance cash assets, which the company operates in the process of economic activity determines the level of its absolute ability to pay (readiness to pay the company immediately to all its immediate financial obligations), affects the amount of capital invested in current assets, as well as characterizes to a certain extent its investment opportunities (enterprise’s investment potential of short-term financial investments).
The main purpose of financial management in the management of cash assets is to ensure permanent solvency.
Along with this main goal an important task of financial management in the management of cash assets is to ensure the effective use of temporarily free funds, as well as to form their investment balance.
Operational (or transactional) cash balance of assets is formed to provide current payments related to operating activities of an enterprise: the purchase of raw materials and semi-manufactures; earnings; taxes; payment to third-party organizations, etc. This type of cash balance is the core part of the total cash assets of an enterprise.
Insurance (or reserve) cash balance of assets is formed for insurance against the risk of delayed receipt of funds from operations due to worsening market conditions for finished products, slow payments and to other reasons. The necessity of forming this kind of balance is due to the requirements of maintaining a constant solvency. Investment (or speculative) cash balance of assets is formed to carry out effective short-term financial investments in the favorable situation in selected segments of money market.
Requirements to ensure continuing solvency of the enterprise determine the need for a high amount of cash assets, i.e. pursue the goal of maximizing their average balance in the financial capabilities of the enterprise. On the other hand, the cash assets of the company during their storage are vulnerable to loss of real value by inflation; in addition, cash assets lose their value over time, which determines the need to minimize their average balance. These conflicting requirements must be taken into account in the management of cash assets, which therefore becomes an optimization in nature.
By the nature of participation the operational process current assets are differentiated as follows:
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