Current asset management in the enterprise

Current assets, serving the production cycle of the company (they are a set of current assets of the enterprise in a form of stocks of raw materials and semi finished products, the volume of unfinished goods and finished goods inventories);

Current assets, serving the financial (money) business cycle (they are a collection of all inventory and the amount of current receivables net of payables).

By period of operation of current assets there are distinguished following types:

1. 
   Constant part of current assets. It is a unwavering part of their size, which is not dependent on seasonal and other fluctuations of the company. In other words, it is regarded as irreducible minimum of liquid assets required for the implementation of enterprise operations.
   
2. 
   Variable part of current assets. It represents a varying portion, which is associated with the seasonal increase in production volume and sales. As part of this kind of current assets there are usually distinguished maximum and average parts of them.
   

Thus, the current assets of the enterprise are assets that characterize set of property assets of the enterprise, serving the current industrial and commercial activity, the value of which is determined by its scale and the nature and depends on the duration and specifics of production and sales cycle, the state of the fixed assets of the enterprise, its relationship with contractors.
A qualitative analysis of internal and external factors affecting the value and condition of the working capital allows to timely detect hidden reserves in the management process of working capital, to take measures on their use and, finally, to detail through the budgeting process the impact of each factor in a specific financial performance .
Management of financing of current assets of an enterprise is subordinated to the goals of the necessary requirements for their respective financial resources and optimization of sources of formation structure of these resources. With this goal financial management of current assets of the enterprise is based.

1.2. Operating cycle of the enterprise and its relationship to current assets

Movement of current assets during cycle goes through four basic stages consistently changing its forms.
Management of current assets of an enterprise is due to the specific design of its operating cycle. Operating cycle is a period of total turnover of entire amount of current assets in which there is a change of their individual species. He characterizes the period between the acquisition of inventory and receiving cash from sales generated from these products.
The most important characteristic of an operational cycle, significantly influencing the volume, structure and utilization of current assets is its duration. It includes the period time from the moment of spending money to purchase input inventories of assets to the receipt of money from the debtors for products sold to them.
Duration of operating cycle is calculated as follows:
OC = AI + CP, (1.1.3)
where OC – operating cycle, days; AI – age of inventories, days; CP – collection period, days.
The age of Inventory shows the number of days that inventory is held prior to being sold.
In the process of current assets management within the operating cycle there are distinguished two major components:

1. 
   Production cycle of enterprise;
   
2. 
   Financial cycle (or series of cash flow) of enterprise.
   

The production cycle of the company characterizes the period of total turnover of the material elements of current assets used to maintain the production process, starting from receipt of raw materials and semi finished products on enterprise and ending by the point of the shipment manufactured finished products to customers.

The duration of the production cycle of enterprise is determined by the following formula:

PC = RM + WIP + FP, (1.1.4)
where PC – production cycle, days; RM – raw materials and semi-finished goods average turnover, days; WIP – work in progress average turnover, days; FP – finished products stock average turnover, days.
Financial cycle (cash flow) of enterprise is a period of time between the beginning of payment to suppliers of raw materials received from them, and materials (satisfaction of accounts payable) and the beginning of cash receipts from customers for goods supplied to them (collection of receivables).
The financial cycle (cash flow) of an enterprise is determined by the following formula:
CF = PC + CP – CAP, (1.1.5)
where CF – cash flow, days; PC – production cycle, days; CP – collection period, days; CAP – current accounts payable satisfaction, days.

1.3. Strategies of financing current assets

An important role in organizing circulation of funds of enterprise plays working capital providing property and operational independence, which determine the financial sustainability of the enterprise. Initially, the formation of equity capital is carried out at the time of creation of a company. It provides fixed and current assets necessary to carry out commercial activities in the amount determined by the constituent documents.
Under conditions of complete economic independence, when businesses have broad powers at the disposal of their own property, at their turnover may be other personal funds, for example, temporarily unused funds of cash in the form of depreciation, bonus, stock maintenance and other specific sources of working capital are profitable investments of temporarily free financial resources.
In addition to its own sources of financing working capital of the enterprise funds are available equated to its own. These are stable liabilities which do not belong to the organization, but are constantly in circulation and used for the current financing. To sustainable liabilities relate:²

• 
  Minimum turning wages payable arising due to timing differences in calculating the date of payment;
  
• 
  Budget debt for payment of taxes, charge of which occurs prior to payment;
  
• 
  Minimum debt reserve to cover future expenses and payments;
  
• 
  Debts to suppliers of goods and services, payment term for which is yet to come;
  
• 
  Due to advances to customers and a partial payment for products. Stable liabilities are a source for coverage of working capital only in the amount of increase, i.e. difference between the value of the end and beginning of the period. This source of funds is also called the proposed accounts payable.
  

In the turnover of the company, apart from its own and similar financial resources, there are also borrowed funds that are based on short-term loans from banks and other creditors. The literature also refers to as “long-term liabilities.”
Policy of current assets financing reflects the overall philosophy of company financial management from the standpoint of a reasonable ratio between the level of profitability and risk of financing activities. Depending on the choice of sources to cover the fixed and variable parts of the working capital economists such as E. Brigham, J. Van Horn, V. Teryokhin, G. Polyak, A. Horin and others identify the following models for financing working capital:

1. 
   Aggressive;
   
2. 
   Conservative;
   
3. 
   Moderate (compromise, optimum, coherent).
   

In the economic literature is also found the concept of “ideal” model of financing of current assets, which leads to the equality of current assets and short-term liabilities.
The choice of a financing strategy boils down to release of the corresponding shares of the capital that is considered as a source of coating of current assets.