Definition of the policy of integrated operational management of current assets and short-term liabilities
The content of the policy of integrated management of current assets is:
• choosing the optimal level and rational structure of current assets taking into account the specifics of the enterprise (corporation) activity
• determining the volume and structure of sources of financing of current assets.
There are three types of asset management policy: aggressive, conservative and moderate. Signs of aggressive policy:
• the enterprise does not limit the increase in current assets;
• The company accumulates stocks of raw materials and finished products, increases accounts receivable and free cash balances on accounts with commercial banks.
As a result, the share of current assets in the total volume of property is high (more than 50%), and the period of their turnover is long (over 90 days).
Aggressive policies can reduce the risk of technical insolvency, but can not ensure a high return on assets.
A characteristic feature of the conservative policy management of current assets is that the enterprise restrains the growth of current assets and seeks to minimize them. As a result, the share of current assets in the total volume of property is small (less than 40%), and the period of their turnover is relatively small. The enterprise conducts such a policy in the situation when the sales volume, the time of receipt of funds and payments for obligations, the necessary amount of stocks and the timing of their delivery are known in advance, or with austerity of all types of resources.
Conservative asset management policy ensures high return on assets. But it carries the risk of high technical insolvency due to unforeseen changes in the situation in the commodity and financial markets.
The moderate policy of management of circulating assets occupies an intermediate position. It is characterized by an average level of profitability and asset turnover.
Each type of management of current assets must meet a certain policy of their financing, i.e. management of short-term obligations.
Significant (more than 50%) specific weight of short-term credits and loans in the total amount of liabilities serves as a sign of an aggressive policy of managing short-term liabilities. With such a policy, the effect of the leverage (leverage) may increase to 30-50% of the return on assets. However, fixed costs also increase due to interest payments on borrowed funds. As a result, the strength of the impact of the production lever (marginal revenue/profit) also increases, which may indicate an increase in entrepreneurial risk.
An indication of a conservative policy of managing short-term liabilities is the absence or low specific weight of short-term loans and loans in the balance currency. Non-current and current assets are covered in this case only by own capital and long-term liabilities.
The neutral proportion of short-term loans and credits in the balance currency serves as a sign of a moderate policy.
It should be noted that the conservative policy of managing current assets may correspond to a moderate or conservative type of short-term liabilities management policy, but not aggressive. Any type of management of short-term liabilities can correspond to a moderate policy of management of current assets. Finally, the aggressive policy of managing current assets may correspond to an aggressive or moderate type of management of short-term liabilities, but not conservative.
Thus, the choice of appropriate sources of financing of current assets is ultimately determined by the balance between the efficiency of using working capital and the level of risk affecting the financial stability and solvency of the enterprise. Diligence in working capital management allows for a significant
reduce the degree of entrepreneurial risk associated with the activities of the enterprise (corporation).
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