How is Working Capital Divided? What Are Its Components? What are the Possible Situations for Working Capital When Associated with the Current Balance Sheet?
For some Accounting scholars, Current Assets constitute the least profitable equity group within companies, since investments in Working Capital do not directly generate physical units of production and sales. One of the importance of Working Capital management is to detect when the company needs capital resources. Therefore, the sooner it is identified, the better for the organization, as help from third parties will not be necessary.
Therefore, Working Capital is part of the organization’s operations, divided into fixed (permanent) and variable (seasonal), thus protecting more than half of the total assets invested. To achieve this, it is necessary for the company to obtain good management so as not to run the risk of having serious problems in the financial area ().
Therefore, PADOVEZE () states that Working Capital (CDG) would be an operational circle with the objective of generating profit, as this process begins with the purchase of stock that goes to production, followed by the sale of the product and, finally, receipt, starting this cycle again. Working Capital is reproduced by total current assets. Working Capital can also be called circulating capital, as it changes within the operating cycle.
The components of Working Capital are characterized by transformation, as they change from asset or revenue. It is the current asset, also known as Working Capital, which assists the organization’s daily operations and is represented by investment, as normal business transmission. According to Assaf Neto (2006), current assets have some basic items that are immediate cash, short-term receivables, inventories and deferred expenses (which are expenses paid, but not yet received for a specific service or product) .
Current liabilities are defined as all the obligations – or debts – of an organization during the year, and can also be called “operating liabilities”, as they finance operational activities. Some of its obligations are loans and financing, purchase of raw materials for use in the production of the product, expenses in the company’s operation, dividends paid to shareholders, purchase of goods, inputs or materials for use by the organization and other obligations. of current liabilities.
Some of the company’s obligations with current liabilities are with third parties, which are represented by financing, taxes, suppliers and others. There are three (3) possible situations for working capital, when associated with the current balance sheet:
- Zero Working Capital, which in relation to current assets and current liabilities (assets and obligations) are equal within 1 (one) year;
- Own Working Capital has a larger amount of current assets, which are the assets and rights to fulfill obligations within 1 (one) year;
- Third-party Working Capital, related to current assets and liabilities. Liabilities, in turn, are greater within 1 (one) year, as assets are smaller than obligations.
Asset Management
According to Silva and Ferreira (2006), the first step to be taken is the knowledge and awareness of all employees that fixed assets are the set of goods intended for maintaining the company’s economic activity, whether in the production of wealth or in the control and administration of these. For these authors, efficient management begins with the implementation of standards and procedures that will determine conduct to be followed in terms of compliance with administrative routines of approval, purchase, entry, registration, identification and others, as well as physical responsibility for assets. They point out that the procedures must be distinct between the area that carries out the control and all other areas of the company, defined as follows:
A) Procedures – Fixed Asset Manager:
- Entry and registration;
- Identification of assets;
- Individual or collective controls;
- Mathematical calculations required by law;
- Write-offs and transfers;
- Documentation storage;
- Monitoring compliance with the standard;
- Physical inventory.
B) Procedures for Other Areas:
- Completing the asset purchase request form;
- Approval of purchase orders;
- Entry of goods into the company;
- Request for transfer of assets;
- Service orders;
- Write-off and sales request;
- Use of assets exclusively in the interests of the company.
Therefore, the manager must constantly promote and review the standard so that it fits the company’s wishes and particularities. The acquisition cost will comprise all amounts paid until the asset is put into use, however, the taxes paid must be analyzed in relation to their final effects, for example, the ICMS on machinery and equipment applied in production (generating wealth) which can be recovered in 48 installments, observing the proportionality of taxed outputs over non-taxed outputs.
The following are considered as components of the acquisition cost: “the cost of a fixed asset comprises its purchase value (including customs clearance costs and non-refundable taxes on the purchase) and any costs directly attributable to placing the Asset in operational conditions for intended use; Any trade discounts and rebates are deducted to arrive at the purchase price” ().
Therefore, it is up to the asset manager, together with other areas of the company, to analyze the economic viability of investing in a given asset. Because it is such an important subject and is directly related to the manager’s work, amortization and exhaustion also have their due importance, thus highlighting how necessary technical and legal knowledge is to perform this function.
Depreciation can be conceptualized as the way in which the decrease in the value of fixed assets resulting from wear and tear through use, the action of nature, perishing or normal obsolescence is recorded in accounting. This is just one of several definitions. However, it summarizes the term well. The depreciable value of a fixed asset must be appropriated on a systematic basis during its economic useful life.
As assets are used in operations, the carrying value of the asset is reduced to reflect this economic benefit, generating depreciation expense. Depreciation must be recorded even if the fair value of the asset exceeds its carrying value. Normative Instruction SRF 130/99 listed some assets in accordance with the NCM (Common Mercosur Nomenclature), and defined their respective useful life terms and depreciation rates, however, it is important to consider the following factors when determining the economic useful life .
- Expected use of the asset by the company, evaluated with production capacity;
- Expected physical wear, which depends on operational factors, such as the number of shifts that require its use;
- Technological obsolescence resulting from changes or improvements in production;
- Legal or similar limits on the use of the asset, such as lease expiration dates, etc.
NOTE: These factors must be analyzed for the accounting acceleration of depreciation.
Decision Models for Executing Economic Events
According to PADOVEZE, the focus of any action is the result of that action. In accounting terms, the action of executing an economic event must be translated into terms of profit or loss. In this way, each transaction of an economic event makes a contribution to the company’s results, which can be viewed within a decision model, both in the simulation and realization options. According to this author, the decision model focusing on results must consider all these aspects in its informational model. The focus comprises the following fundamentals of economic management:
- Unrestricted adoption of the concept of opportunity cost;
- Measurement of the operational result of the event under cash value conditions;
- Measurement of the financial impact on the event, both in relation to payment and receipt deadlines and the cost of capital;
- Performance assessment using standard or budgeted data.
The model aims, firstly, to measure the operational contribution margin of the economic event, which is the result in the spot condition. It comprises the value of the event’s revenue minus its variable costs. Any direct costs specific to the event must be considered as variable costs.
The main variable operational cost of the event is the opportunity cost at market prices, at its lowest price. The financial contribution margin represents: the revenue (or cost) of financing the event, minus the opportunity cost (or revenue) of financing it, financial opportunity costs. Fixed costs and expenses arise from this type of expenditure from the total activity responsible for the event.
References
() ASSAF NETO, Alexander. Structure and analysis of balance sheets: an economic and financial approach: commerce and services, industries, commercial and multiple banks. 8. ed. São Paulo: Atlas, 2006.
() PADOVEZE, Clóvis Luís. Introduction to financial administration: text and exercises. São Paulo: Thomson, Cengage Learning, 2005
() IBRACON (Institute of Independent Auditors of Brazil). Number 7 June 2001.
JULIO CESAR S. SANTOS
Professor, Journalist and Speaker. Writer for important newspapers in RJ, author of several books on Marketing Strategies, Promotion, Merchandising, Human Resources, Quality in Customer Service and Leadership. For more than 30 years he trained teams of Attendants, Supervisors and Sales, Marketing and Administration Managers in multinational consumer goods and services companies. He created the Postgraduate course in “Business Management” and is currently Academic Director of the Méier Educational Center and the Brazilian Association of Journalism and Communication (ABRICOM). Master in Business Management and specialist in Strategic Marketing