Operational production and financial cycle. Accounts receivable management

The management of current assets of an enterprise is associated with specific features of the formation of its operating cycle.The operating cycle is the period of full turnover of the entire amount of current assets. In the process of which there is a change of their individual species. The movement of current assets of the enterprise in the process of the operating cycle takes place four main stages, successively changing their forms:

At the first stage monetary assets are used to purchase raw materials and supplies, i.e. incoming stocks of tangible current assets.

At the second stage incoming stocks of tangible current assets as a result of direct production activities are converted into stocks of finished products.

At the third stage stocks of finished products are sold to consumers and before the onset of their payment are converted into receivables.

At the fourth stage collected, i.e. paid receivables are retransformed into cash assets.

The most important characteristic of the operating cycle, which significantly affects the volume, structure and efficiency of the use of current assets, is its duration. It includes the period of time from the moment the enterprise spends money on the acquisition of incoming inventories of tangible current assets until the receipt of money from debtors for the products sold by it.

The principal formula by which the duration of the operating cycle of an enterprise is calculated is as follows:

OTs = PO yes + PO zm + PO gp + PO dz;

where, ON yes - the period of turnover of the average balance of monetary assets, in days;

PO mz - the duration of the turnover of stocks of raw materials, materials and other material factors of production as part of current assets, in days;

ON gp - the duration of the turnover of stocks of finished products, in days;

ON dz - the duration of the collection of receivables, in days.

In the process of managing current assets within the operating cycle, two main components are distinguished:

- enterprise production cycle characterizes the period of complete turnover of material elements of current assets used to service the production process, starting from the moment raw materials and semi-finished products arrive at the enterprise and ending with the moment the finished products made from them are shipped to customers. The duration of the production cycle of the enterprise is determined by the following formula:

PC \u003d PO cm + PO nz + PO gp;

where, PO cm - the period of turnover of the average stock of raw materials, materials and semi-finished products, in days;

ON nz - the period of turnover of the average volume of work in progress, in days;

PO gp - the period of turnover of the average stock of finished products, in days.

- financial cycle (cash turnover cycle) of an enterprise represents the period of the full turnover of funds invested in current assets, starting from the moment of repayment of accounts payable for raw materials and semi-finished products received, and ending with the collection of receivables for delivered finished products. The duration of the financial cycle of the enterprise is determined by the following formula:

FC \u003d PC + PO dz - PO kz;

where, PC is the duration of the production cycle of the enterprise, in days;

ON dz - the average period of turnover of receivables, in days;

PO kz - the average period of turnover of accounts payable, in days.

Essence of accounts receivable. Forms of refinancing of accounts receivable.

The current stage of the country's economic development is characterized by a significant slowdown in the payment turnover, causing an increase in accounts receivable at enterprises. Therefore, an important task of financial management is the effective management of accounts receivable, aimed at optimizing its total size and ensuring timely debt collection.

In modern economic practice, receivables are classified into the following types: a). for goods, works, services, the payment term for which has not come b). for goods, works, services not paid for on time c). on bills received d). according to the calculations with the budget d). on settlements with personnel e). other types.

The receivables management policy is part of the general current asset management and marketing policy of the enterprise, aimed at expanding the volume of sales of products and consisting in optimizing the total amount of this debt and ensuring its timely collection.

The formation of an enterprise's receivables management policy (or its credit policy in relation to product buyers) is carried out according to the following main stages:

1. Analysis of accounts receivable of the enterprise in the previous period. The main objective of this analysis is to assess the level and composition of the company's receivables, as well as the effectiveness of the financial resources invested in it. Analysis of accounts receivable for settlements with buyers is carried out in the context of commodity (commercial) and consumer credit.

2. Formation of the principles of credit policy in relation to the buyers of products. In modern commercial and financial practice, the sale of products on credit (with a deferred payment for it) has become widespread, both in our country and in countries with developed market economies. The formation of the principles of credit policy reflects the conditions of this practice aimed at improving the efficiency of the operating and financial activities of the enterprise.

3. Determination of the possible amount of financial resources invested in receivables for commodity (commercial) and consumer credit. When calculating this amount, it is necessary to take into account the planned volumes of sales of products on credit; the average period for granting a deferred payment for certain forms of credit; the average period of delay in payments based on the prevailing business practice (it is determined by the results of the analysis of receivables in the previous period); the ratio of the cost and price of products sold on credit.

4. Formation of a system of credit conditions. These conditions include the following elements:

Loan term (credit period);

The amount of the loan (credit limit);

The cost of providing a loan (a system of price discounts when making immediate payments for purchased products);

The system of penalties for delay in the fulfillment of obligations by buyers.

5. Formation of standards for assessing buyers and differentiating the conditions for granting a loan. The basis for establishing such standards for evaluating buyers is their creditworthiness. The creditworthiness of the buyer characterizes the system of conditions that determine its ability to attract a loan in various forms and in full, within the stipulated time frame, to fulfill all financial obligations associated with it.

The formation of a system of customer evaluation standards includes the following main elements:

Determination of a system of characteristics that assess the creditworthiness of individual groups of buyers;

Formation and examination of the information base for the assessment

creditworthiness of buyers;

The choice of methods for assessing individual characteristics of the creditworthiness of buyers;

Grouping buyers of products according to the level of creditworthiness;

Differentiation of credit conditions in accordance with the level of creditworthiness of buyers.

6. Formation of the collection procedure for receivables. As part of this procedure, the following should be provided: the terms and forms of preliminary and subsequent reminders to buyers about the date of payments; the possibilities and conditions for prolonging the debt on the granted loan; conditions for initiating bankruptcy proceedings against insolvent debtors.

7. Ensuring the use of modern forms of refinancing receivables at the enterprise. The development of market relations and the infrastructure of the financial market make it possible to use a number of forms of receivables management in the practice of financial management - its refinancing, i.e. accelerated transfer to other forms of current assets of the enterprise: cash and highly liquid short-term securities.

8. Building effective systems for monitoring the movement and timely collection of receivables.

Operating period (operating cycle, duration of the operating cycle), in days

Defined as: Inventory turnover time + Receivables turnover time

Inventory turnover (in days)= (Inventory + VAT) / Cost per year

Turnover of funds in settlements (in days)= Short-term accounts receivable / annual revenue

The operating cycle shows the time for which the resources of the company, including those received in the form of deferred payments, commercial or trade credits (accounts payable) are frozen in inventories and receivables.

The operating cycle is considered before calculation

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Current assets - the most mobile part of the property of the organization. These are objects, the use of which is carried out by the organization within one operating cycle or within a relatively short calendar period of time (year). These are investments in the mobile assets of the enterprise, which are cash or can be turned into them within a year or one operating cycle if it exceeds a year.

The circulation of current assets covers three stages: procurement (purchases), production and marketing:

• At the stage of purchases, current assets are transferred from the monetary form to the production one (objects of labor or goods).
• At the stage of production, resources are embodied in products, the result of this stage is the transition of current assets from the production form to the commodity one.
• At the stage of implementation, current assets from the commodity form again pass into the monetary one.

The duration of the production, operational and financial cycles is the most important indicator of the effectiveness of current asset management:

• The production cycle is a cycle of operations with tangible current assets, i.e. the period of time from the purchase of raw materials to the receipt of finished products.
• The operating cycle is the period of time from the purchase of raw materials to payment for finished products (if the organization works on a prepaid basis, then the end of the operating cycle will be shipment, and not payment for finished products).
• The financial cycle is the period of time from payment for raw materials to receipt of cash for products sold. The financial cycle determines the need for working capital, i.e. the need for financing the operating cycle, not covered by accounts payable. The financial cycle is not only the most important indicator of the effectiveness of managing current assets, accounts payable and working capital of an organization, but also an indicator of the stability of the organization's market positions and its ability to finance the production cycle at the expense of market counterparties, i.e. the ability to dictate their terms to counterparties.

We can distinguish the following segments from which the duration of the production, operational and financial cycles is formed.

1. The time spent by raw materials and materials in the warehouse.
2. duration of the production process.
3. The time spent by finished products in the warehouse.
4. Due date for receivables.
5. Due date for accounts payable.
6. Duration of circulation of advances issued.
7. Duration of circulation of received advances.

The duration of each segment is calculated as follows.

1. The residence time of raw materials and materials in the warehouse is calculated by the formula

Ts = (Zs / MZ) * 365

where Зс - the cost of stocks of raw materials and materials; MZ - material costs per year.

2. The duration of the production process is calculated by the formula

Tpr \u003d [Znp / (Sp * kn)] * 365,

where Znp - the cost of stocks of work in progress; Cn - cost of goods sold; kn is the cost escalation factor that characterizes the ratio of the value of work in progress to the total cost of production, is calculated by the formula , selling and administrative expenses.

3. The time spent by the finished product in the warehouse:

Tg = (Zg / Sp) * 365

where Zg is the cost of stocks of finished products.

4. Maturity of receivables:

Td \u003d (DZba / V) * 365

where DZba - accounts receivable without advanced payments; B - revenue (net).

5. Maturity of accounts payable:

Tk \u003d (KZba / Ro) * 365

where KZba - accounts payable without received advances.

6. Duration of circulation of issued advances:

Tav \u003d (Av / MZ) * 365

where Av - issued advances.

7. Duration of circulation of received advances:

Tap = (Ap / B) * 365

where Ap — received advances.

Production cycle time:

Dpr \u003d Ts + Tpr + Tg

Operating cycle duration:

Add \u003d Ts + Tpr + Tg + Td

Duration of the financial cycle:

Df \u003d Add + Tav - Tk - Tap

To calculate the duration of the production cycle, it is also possible to use a simplified algorithm:

D'pr \u003d (Z / Sp) * 365

where Z is the sum of the items “reserves” and “VAT on acquired values”.

It is also possible to calculate the maturity of receivables and payables without allocating advances.

There are four options for financial cycles:

• classic: accounts receivable (without advanced payments) exceeds received advances; accounts payable (excluding advances received) exceed advances paid;
• reverse: received advances exceed accounts receivable (without issued advances); advances issued exceed accounts payable (excluding received advances);
• extended: receivables (without advances issued) exceed advances received; advances issued exceed accounts payable (excluding received advances);
• shortened: advances received exceed accounts receivable (without advances issued); Accounts payable (excluding advances received) exceed advances paid.

The types of financial cycles given above are very conditional. They do not take into account the presence of both advances issued and accounts payable to suppliers and contractors, or advances received along with accounts receivable from buyers and customers.

For analytical purposes, advances should be compared with accounts payable (without advances received) and advances received with receivables (without advances issued). Then, taking into account the dominant indicator, a final assessment of the financial cycle should be given.

The shorter the cycles, the lower the degree of provision of the organization with current assets and the riskier the organization. However, the longer the cycles, the higher the organization's need for funding sources and the higher the funding costs. It is possible, in particular for wholesale intermediaries, where a long financial cycle leads to a complete loss of margin due to the payment of interest on loans raised to finance receivables.

Thus, there is a contradiction between the efficiency of activity, on the one hand, and financial stability, on the other. Changing the scheme of payment to suppliers to prepayment terms compared to settlements as delivered can, under certain conditions, be considered as a sign of the loss of the organization's market position and a threat to the continuity of its activities, since it creates an additional need for financial resources. Reducing the financial cycle time can be achieved in three ways:

• reducing the duration of the production cycle by optimizing the scheme for purchasing raw materials, optimizing the production process and reducing the time spent by finished products in the warehouse;
• reduction in the maturity of receivables due to tightening of credit policy, provided that this is allowed by market conditions;
• increasing the maturity of the duration of accounts payable by obtaining a deferral of payments to suppliers.

An extended cycle is characterized by significant receivables and high balance sheet financial strength (due to an increase in liquid assets), but losses in financing the financial cycle can have an opposite effect (through a decrease in profits) on the operational financial strength of the organization.

A shortened financial cycle, which is characterized by significant accounts payable and low balance sheet financial stability, positively affects the profit of the organization and the operational financial stability of the organization. In addition, the duration of the financial cycle indirectly characterizes the market position of the organization in the sales and supply market. The advances received indicate the presence of a certain market power of the organization in the sales market, while the advances issued, on the contrary, indicate the presence of this power in the suppliers.

An effectively managed and financially stable organization is characterized by a classic financial cycle, without significant advances, with balanced receivables and payables. But effective organizations with significant market power often purposefully reduce the duration of the financial cycle, financing a significant part of the production cycle at the expense of their counterparties through advances received and accounts payable to suppliers and contractors; while financial stability remains very high.

When evaluating the dynamics of the duration of the components of the operating cycle and developing a cycle management strategy, it must be taken into account that it reflects not only the degree of efficiency of working capital management, but also the objective processes taking place at the enterprise, which can lead to an increase in the operating cycle.

In particular, this may be a change in the range of products, stock formation policy, credit policy, etc. In this case, the lengthening of cycles and, consequently, the decrease in the turnover of current assets should be compensated by an increase in the margin, which ultimately leads to an increase in the return on invested capital of the organization and does not worsen its position in terms of value creation.

When determining the predicted duration of the constituent cycles, it is necessary to take into account the identified trends in its change, as well as an expert assessment of the future dynamics of these indicators.

The cash itself, i.e. not invested in the business, they cannot generate income, on the other hand, the enterprise must always have a certain amount of free funds - this determines the need for a certain systematization of approaches to asset management. In general, the system of effective cash management implies the allocation of four large blocks of procedures: calculation of the financial cycle, cash flow analysis, cash flow forecasting, determination of the optimal level of cash.

Among the most important characteristics of the efficiency of current activities are indicators of the duration of the operating and financial cycles. The operating cycle is the conditional name of the period as a typical recurring element of the production and commercial process (from the receipt of raw materials to the return of funds in the form of proceeds), during which the funds are dead in stocks and settlements (debtors); An analytical indicator that characterizes the average time of deadening of funds in these assets is called the duration of the operating cycle. The beginning of the operating cycle is the appearance of inventories on the company's balance sheet as a signal of the beginning of the transformation chain "raw materials (with the appearance of an obligation to pay for it) - products - settlements - cash", and its end - the appearance on the balance sheet of proceeds from the sale of manufactured and sold products. The operating cycle begins from the moment the obligation to pay for the acquired inventories arises, that is, from the moment the funds are formally invested in inventories, and ends with the moment the funds are returned to the company's accounts in the form of revenue.

The financial cycle is the conditional name of the period as a typical recurring element of the trade and technological process, at the beginning of which the funds actually "leave" as payment to suppliers for the raw materials purchased from them and at the end of which they "return" in the form of revenue. An indicator characterizing the average duration between the actual outflow of funds in connection with the implementation of current production activities and their actual inflow as a result of production and financial activities is called the duration of the financial cycle.

The reduction of the operating and financial cycle in dynamics is considered as a positive trend and vice versa. If the reduction in the operating cycle can be done by accelerating the production process and the turnover of receivables, then the financial cycle can be reduced both due to these factors and due to some non-critical slowdown in the turnover of accounts payable.

Thus, the duration of the financial cycle in days of turnover is calculated according to formula 1:

PFC \u003d POC - WOK, (1)

where POC is the duration of the operating cycle (receivables turnover in days + inventory turnover in days), thousand rubles;

VOK - the time of turnover of accounts payable, thousand rubles.

The calculation of the duration of the operating and financial cycle for 2005 - 2007 is presented in table 10.

Table 10 - Calculation of the duration of the operating and financial cycle of OOO "Firma" Tik "for 2005 - 2007

Name of indicator	Calculation formula		Abs. off 2007 from 2005
Accounts receivable turnover, turnover	Sales revenue/average receivables
Duration of 1 turnover of receivables, days	360/receivables turnover
Inventory turnover, turnover	Revenues from sales / average reserves
Duration of 1 inventory turnover, days	360/inventory turnover
Accounts payable turnover, turnover	Sales proceeds / average accounts payable
Duration of 1 turnover of accounts payable	360/ accounts payable turnover
Operating cycle duration, days	Accounts receivable turnover + inventory turnover
Duration of the financial cycle, days	The duration of the operating cycle - the duration of the turnover of accounts payable

The data in Table 10 show that the turnover of receivables in 2007 decreased from 3.8 in 2005 to 2.5 turnovers per year, thereby increasing the duration of one turnover by 49 days.

Inventory turnover in 2007 was 5.3 turnovers per year, which is 3.4 turnovers less than in 2005, when this figure was 8.7 turnovers per year. The duration of one revolution increased by 27 days.

The turnover of accounts payable in 2007 decreased by 2.4 turnovers per year compared to 2005, the duration of one turnover increased by 98 days.

Due to the high duration of one turnover of inventories and receivables, the duration of the operating cycle of Firma Tik LLC increases from 2005 to 2007. In 2007, the duration of the organization's operating cycle was 212 days, which is 76 days more than in 2005.

The duration of the financial cycle of Firma Tik LLC in 2005 - 2007 is a positive value, which indicates the growing needs of the organization in attracting borrowed funds. In 2007, this indicator in the organization amounted to 32 days, but this is 22 days less than in 2006 The decrease in the financial cycle indicator is a positive trend, as it indicates a decrease in the need for borrowed funds.This is due to the management of accounts payable, due to the fact that the organization postpones the repayment period.

For the normal operation of the enterprise, working capital must be at all stages of the operating (production) cycle and in all forms (commodity, production and cash). The absence of any element of working capital at one of the stages leads to a stop in production. If the goods are sold on credit (with deferred payment), then the company needs working capital to cover receivables until payment for the products is paid. The full cycle of turnover of current assets is measured by the time from the moment of purchase of raw materials and materials from suppliers (payment of accounts payable) to payment of finished products by consumers (repayment of receivables). The company does not always receive funds from buyers at the time of payment to suppliers for raw materials and supplies, so there is a problem of managing the operating cycle of current assets. Bocharov V.V. Corporate Finance. - St. Petersburg: Peter, 2008. - S. 159

The operating cycle at the enterprise consists of the following stages:

• 1) purchase of raw materials, materials and other similar valuables and payment of supplier invoices;
• 2) processing of raw materials and materials in order to obtain marketable products and remuneration of employees at the expense of available funds;
• 3) sale of finished products and presentation of payment documents to buyers;
• 4) receipt of funds from buyers for sold products.

Reducing the time for all stages of this cycle is of great importance in the effective management of working capital. If it is possible to pay for goods (products) after their sale, the need for working capital can be significantly less.

The operating cycle (OC) characterizes the total time during which current assets (funds) are immobilized into inventories and receivables: Ibid. - S. 161

ots = po3 + poLZ,

where POe - the period of inventory turnover (raw materials and materials, work in progress and finished products), days;

POd3 - receivables turnover period, days.

The difference between the terms of payment for their obligations to suppliers and the receipt of funds from buyers is a financial cycle (FC), during which they (funds) are diverted from the enterprise's turnover:

FC \u003d OC - POkz,

where OTs - the duration of the operating cycle, days;

GYuKZ - the period of turnover (payment) of accounts payable, days.

The decline in production and financial cycles in dynamics is a positive trend. Such a reduction in cycles can occur for three reasons: Bocharov V.V. Corporate Finance. - St. Petersburg: Peter, 2008. - S. 162

• 1) speeding up the production process;
• 2) accelerating the turnover of receivables;
• 3) slowing down the repayment period of accounts payable (within the framework of business ethics), which creates an additional source for the formation of current assets for the enterprise.

For example, the inventory turnover period is 65 days; receivables turnover period - 35 days; period of repayment of accounts payable - 46 days. Then the duration of the cash flow is 54 days (65 + 35 - 46). This means that the company must find financial resources within 54 days from the start of production to continue the operating cycle.

The following factors influence the formation of the cash cycle:

• organizational and legal form of an economic entity;
• industry specifics and type of business;
• Features of market conditions (supply and demand for goods, the level of prices for them, etc.);
• availability of attraction of financial resources from the financial market;
• · economic conditions in the country (monetary and financial policy of the state, inflation rates, energy prices and freight traffic).

All these factors have an ambiguous effect on the formation of cash flow cycles in the current activities of the enterprise. Therefore, the service of the financial director is obliged to take them into account in the process of managing cash flow and promptly respond to possible fluctuations in the inflow and outflow of funds.