The economic essence of capital
When capital understand the material means and funds invested in the company for the purpose of business. Better understand the nature of capital can be considered its classification in the economic literature.
Depending on who are invested in the economic activity of the material means and funds, capital divided into equity and debt. During understand equity funds and facilities that are independently formed company for their development. Until debt capital include cash and other property involved to finance the development of the enterprise from external sources paid a rotating basis.
For the duration of long-term use of isolated constant capital (or permanent) and short-term variable capital.
The main feature of grouping the articles of the asset balance is the degree of liquidity, ie the rate of reverse transformation of invested capital in funds.
Depending on the direction of placing funds in capital assets of the company is classified into fixed and circulating. However, you can separately allocate capital used in domestic turnover and outside (accounts receivable, long-term and current financial investments). Schematically equity depending on the areas of its deployment is illustrated in Fig. 7.2. Investments of foreign capital in financial instruments shows that in previous years the company had free cash. However, capital invested outside the enterprise can be regarded as a reserve mobilization in the economy of additional funds when increasing its own investment needs or worsening current solvency.
Working capital can be in production (inventory, work in progress, prepaid expenses) and in turnover (finished goods in warehouses and products shipped to customers, accounts receivable, cash, current financial investments, goods for trade and so on. Al. ). Working capital can operate in monetary and material forms.
It is very important in terms of financial management are combined classification of capital, which combines different classification criteria: ownership of equity, duration of use and directions placement.
That part of the working capital, which is formed on a permanent basis, called his own working capital (or net working capital). Detail possible strategies for financing of assets discussed in section 6. The lack of its own working capital leads to increasing financial dependence and demonstrates the precarious financial situation of the company.
However, the financial manager interested in not only the volume of its own working capital, but its share in total equity (or capital mobility factor).
Factor mobility of capital shows how much equity the company is in circulation, that is in a form that allows you to easily maneuver the investment.
This ratio should be high enough to ensure sufficient flexibility and mobility to use the equity of the company.
Thus, the effectiveness of capital of the company at the same time depends on two groups of factors:
- Firstly, how to optimally combine equity and debt, long-term (permanent) and short (variable) sources of financing investment needs of the enterprise;
- Secondly, from the fact that the total volume of investments in fixed and working capital, as it is in production and the sphere of circulation, in money and material forms and how best their relationship.
This necessitates the development of a balanced policy of capital formation and its agreement with the policy formation of assets.
Determination of the total capital requirements may be direct or indirect methods. The direct method is based on a detailed planning enterprise investment needs for specific assets, fixed assets, intangible assets, inventory, cash (in development stage company virtually no receivables, current and long-term financial investments).
This method can be applied in determining the total capital requirements for the new company, and in the case study required additional capital to expand production of existing enterprises, modernization and diversification.
For enterprises equally dangerous is aborted capital and its excessive volume. So, if established production capacity not used at full capacity due to lack of raw materials, or vice versa, when the accumulated excess inventories that can not easily be processed on existing production facilities, is freezing invested capital, slowing its turnover and the consequent worsening financial state enterprises and the risk of loss of profits.
Recognizing overall capital requirements for the new company should consider the following limitations:
- Formed capital is enough to cover all costs in the implementation of the project (doinvestytsiyni studies, acquisition of property rights, design work, construction of administrative and production facilities, marketing, training, purchase and installation of equipment, establishment of working capital, etc.);
- When forming the initial capital must be based on the minimum requirements in assets in order to start a business enterprise (impractical to build large reserves of reserves and cash, besides reducing the need for financial resources in the initial stages can be achieved by lease of fixed assets and by a parallel flow investments and profits);
- Formed capital should not be less than a minimum amount of share capital for certain types of companies (the minimum amount of the authorized fund of joint stock companies is 1,250 minimum wages, and for limited liability companies - 625 times the minimum wage).
Indirect (indirect) method of calculating the total capital requirements are less labor intensive and is based on the use of relative indicators - capital intensity of production (average amount of capital invested per unit of output). This figure differs significantly by sector of the economy and gives the investor an idea of the level of capital intensity and material consumption. However, the level of capital intensity of production depends not only on a particular industry, but also the scale of the enterprise, the stage of its life cycle, the level of technological equipment production and the degree of depreciation of production facilities.
Use indirect method is advisable in previous stages of the investment project because it gives only a rough idea of the size of the required initial investment. For settlement funding sources need to apply direct method.
To determine the capital requirements indirect method necessary capital intensity of production (on the same industry or the industry average) multiplied by the planned output. Also, be aware peredstartovi costs and expected capital reserve in case rise construction works, construction materials, raw materials, etc. (usually at least 10% of the total cost for the construction and operation of the investment object).