О.E.DANILEVSKA –ZHUGUNISOVA
UDC. 336.012.23
STRATEGIES OF WORKING CAPITAL MANAGEMENT AND
THEIR IMPACT ON THE FINANCIAL CONDITION
OF THE ENTERPRISES
Annotation. In the article it is investigated and summarized the strategy and
tactics of working capital management for food industry enterprises and is
estimated their impact on the financial condition of enterprises
Keywords: assets, working capital, financial condition, management,
strategy, tactics
Setting of the problem. In modern conditions for many domestic enterprises
the typical consequence of the crisis phenomenon of their economic development
is acute shortage of working capital, which is accompanied by low level of usage.
Development of market relations in Ukraine and experience of foreign system of
management determine the dependence of the results of activity of the enterprises
from the effectiveness of management of the process of formation and use their
working capital. Therefore, studies of management system of working capital are
acquired of particular importance as an important factor to enhance the efficiency
of functioning of industrial enterprises.
The financial services of enterprises typically use a standard set of indicators
recommended by the Ministry of Economy of Ukraine, State Statistics Committee
of Ukraine to measure the effectiveness of working capital management. In a
market conditions arose a need to develop integrated management system of
working capital and methodology for assessing its impact on the financial state of
enterprises including industrial features. Implementation of such developments will
strengthen the financial stability and solvency, ensure adequate level of
profitability of enterprises by optimizing the volume and structure of working
capital.
Conceptual foundations of essence and theories of working capital
management are considered in scientific papers of domestic and foreign scientists-
economists: I. Balabanov, A. Bileychenko, I. Blanc, E. Brigham, J. Van Horn, O.
Vasylyk, A. Zolotarev, I. Zyatkovskiy, V. Kovalev, A. Mazaraki, L. Martyusheva,
E. Nikbaht, L. Pavlova, A. Poddyerohin, G. Polyak, R. Slav'yuc, V. Stolyarov, E.
Stoyanova, Y. Helfert, A. Sheremet, K. Shim Jay and others.
However, there are a number of theoretical and practical issues that remain
unresolved as at the level of enterprise in a whole, and as at the level of individual
industries. These include the problems of providing working capital with defining
the structure and sources of its formation, assessing the impact of management
system of working capital on financial state and activity of enterprises.
So at the present stage of transformation of management principles of
functioning of enterprises system of working capital management and ways of its
improving take priority.
The aim of the article is to explore and summarize the strategy and tactics
of working capital management and estimate their impact on the financial
condition of enterprises.
Presentation of the main material. Development of market relations in
society leads to new principles of management of enterprise. Earlier, in a
centralized command-administrative management conditions, determination of the
strategy of production development of enterprises was not covered under the
competence of its bureaucracy. The main part of the strategic decisions was taken
as above: parent departments, industry ministries, agencies, organs of State
Planning etc. Enterprises have continued the role of performers of such decisions.
So at the level of the enterprise, there was no need to engage in strategic
management.
Market conditions deprive the head of the company privileges of strategic
irresponsibility for his actions. He must make crucial, long-term, strategic
decisions independently, considering the economic situation, laws and regulations
that determine the rules of production activity and market conjuncture. But he
bears full responsibility to himself, the staff and finally to the law for all economic,
legal, social, environmental and other consequences of strategic decisions taken.
All this leads to the necessity of not only the analysis of economic activity,
which has developed in the past period, but also the preliminary analysis of
development strategies in the future period.
The term "strategy" has a military background and displays a set of related
actions for the successful conduct of operations [4, sec. 5].
Economic strategy is a set of economic actions, which are aimed at efficient
production, commercial, financial and other enterprise activity.
Management Strategy is an implementation of the concept, which combines
targeted approach to enterprise activity that enables to set goals, compare them
with existing capabilities of the enterprise and bring them into compliance through
the development and implementation of the system of strategies [7. 27].
Features of the management strategy depend on the interaction of such
factors [7. 28]:
- industrial affiliation;
- type of production, level of specialization, concentration and cooperation;
- features of manufacturing capacity;
- Management level;
- qualification level of personnel.
Financial solutions include short-term, medium-term and long-term
perspective of the enterprise activity. They lead to certain changes in profitability
and investment risk to the enterprise, so it is leading to changes in the enterprise
competitiveness on the capital market. Increasing of the profitability or reducing of
the risk increase supply of financial resources, improve the conditions of their
provision. Forecasts deteriorating financial performance (profitability), on the
contrary, reduce the competitiveness of the enterprise on capital market.
Making of financial decisions always allows achieving a certain compromise
between the demands of profitability, safety and liquidity of the capital of
enterprise.
In the decision-making activities associated with risk, there
are four main processes (stages):
• creation of a subjective understanding of the situation. It is based on
constructing an imaginary model of a situation;
• evaluation the consequences of alternatives. The aim is to assess the
subjective value, that’s usefulness of consequences. This estimate is based on
providing for these consequences set of numerical values;
• prediction of conditions that determine the consequences. In the process of
forecasting a person who makes decisions, assesses the subjective probability of
meeting the terms or conditions that determine the consequences of this alternative;
• choice of alternative. In the final phase of making decisions, the
management provides an alternative choice according to their goals.
Under the strategy of working capital management of enterprises it is
understood management activity, which are aimed at achieving the strategic goal of
the enterprise through the process of formation of volume, structure, working
capital, sources of funding and fundraising costs, efficient usage.
Tactics of working capital management is a specific methods and techniques
to achieve the goal in a certain situation and at a certain time. The task of working
capital management tactics is the choice of optimal solutions and ways to
implement the current situation on the enterprise.
Working capital management strategy is subjected to the following strategic
targets of the enterprise as:
• maximization of profit of the enterprise;
• providing the investment appeal of the enterprise;
• providing the financial stability of the enterprise;
• expansion of production from their own sources of formation of working
capital.
Target in working capital management is to determine the scope and structure
of working capital, sources in their coverage and the ratio between them, sufficient
to ensure long-term production and effective financial activity of the enterprise.
During the development the methodology for determining the impact of
strategic goals of the enterprise on his tactical decisions in the branch of the
management of working capital it is appropriate to use the machine of programbased modeling. There are two approaches to program-based modeling.
According to the first approach, firstly analyzes the state of the system, and
then opportunities are evaluated. Based on this the aim is defined then determined
actions, which are directed to achieve that goal, and program is made.
According to the second approach, identifying the goal is a first step, and only
then it is estimated the factors from the perspective of achieving the goal, after that
are defined objectives to achieve this goal, and program is made.
Considering the second approach, it can be proposed the following sequence
of choices the tactical decisions on the working capital management depending on
strategic goals:
Stage 1. Defining the strategic goal of enterprise.
Stage 2. Defining the factors that influence the risk of failure to achieve the
strategic goal of enterprise.
Stage 3. Formation of the tasks of working capital management.
Stage 4. Total formalization of interference in business strategy of the
enterprise and his tactics for the management of working capital.
Stage 5. Development of the criteria to assess the effectiveness of the
enterprise policy about working capital.
Stage 6. Selection the strategy of operative management of current assets and
current liabilities of the enterprise.
This research does not aim at description of the methods for determining
priority of one another strategic goal for the enterprise, however, going to the
gradual specification of the proposed methodology, it is necessary first to identify
endogenous and exogenous parameters of the enterprise system, affecting on its
choice.
To the endogenous parameters of the system will be referred the financial
state of the enterprise that include the relative financial indexes (liquidity, capital
structure, business activity and profitability); appraised value of the enterprise
property and absolute financial indexes (net income, current assets, depreciation,
value of accounts receivable and accounts payable , the value of tax payments).
To the exogenous parameters of the system are referred
the formed
conjuncture of the market, the basic laws of the state, system of taxation of the
enterprise, external sources of finance, information communications of the
enterprise.
The tasks of working capital management, which correspond to the four main
strategic objectives of the enterprise, are formed in Table 1.
Table 1
Formation of working capital management tasks that meet the strategic
goals of the enterprise
Strategic goals of
the enterprise
Factors affecting the risks,
associated with this strategy
1
1. Maximization of
the enterprise
profit
2
• Ratio between the volumes of
necessary and available working
ca
• Structure of working capital by
the level of liquidity
• Composition of the finance
sources of current assets
2. Providing of
investment
attractiveness of
the enterprises
• Insufficiency of the absolutely
liquid assets
• Insufficiency of the industrial
stocks
• High level of the current
indebtedness
3. Providing of
financial stability
of the enterprise
• Ratio between borrowed and
own sources formation of
working capital
• Quality of receivables
• Synchronization of incoming
and outgoing cash flows
• Increase of need of the
enterprise in working capital
• Need in the additional external
finance to cover deficit of
working capital
• Earning risk
• Risk that is connected with
involvement of own capital from
4. Expand of
production by the
own costs of
formation of
working capital
Content of management tasks that
are related to the interests of this
strategy
3
• Determination of the optimum volume
of the capital assets
• Providing of the preset profitability of
current assets
• Minimization of the total costs of
financing the current assets
• Choice of the model of financing the
working capital
• Providing of the optimum volume of
the circulating assets that are needed for
support of current activity of the
enterprise
• Optimization of the structure of
working capital by the level of its
components liquidity
• Optimization of payables
• Providing of the rational structure of
working capital of the enterprise
• Optimization of the volume of
receivables of the enterprise
• Optimization of the volume of cash
flows of the enterprise
• Providing of the volume of working
capital that arise in case of the
investment project
• Optimization of the structure of
working capital of the enterprise
•Accelerate the turnover of working
capital
1
2
external sources
Continued of Table 1
3
Before going to the formalization of enterprise strategy and his tactics in the
management of working capital let’s concentrate on the
strategy of working
capital financing, which is an integral part of the overall strategy of working
capital management and its individual subsystems.
Depending on the choice of sources covering fixed and variable part of
working capital such economists as E. Brihhem [2] J. Van Horne [3] G. Polyak [5]
V. Teryokhin [6] and others produce the following strategy of working capital:
1) aggressive;
2) conservative;
3) moderate (a compromise, optimum agreed).
As complement to them, V. Kovalev highlights and describes the ideal
model.
Selecting a particular model of the funding strategy is reduced to
establishing the value of long-term liabilities and on its basis of volume of the net
working capital.
Strategy A (aggressive). This strategy consists in the financing on longterm basis fixed assets and permanent part of current assets. The variable part of
current assets is fully covered by short-term debt. Risk associated with aggressive
strategy is high. This strategy can be afforded only by the enterprise that has no
problems with the completion of short-term loans or to obtain commercial credit
providers.
Strategy B (compromise). Working capital management is a compromise
between aggressive and conservative model. It is connected with the financing of
one part of current assets through long-term liabilities, and another is by the
expense of short-term liabilities.
Strategy C (conservative). Indicator of conservative policy management of
current liabilities serves absence or very low share of short-term loan in the total
amount of all liabilities of the company. In this case current assets are financed
mainly through personal funds and long-term sources. Typically, the conservative
strategy is used in the initial stages of the enterprise existence provided sufficient
quantity of capital owners and availability of long-term loans for investment
financing.
Let’s consider working capital management strategy aimed at achieving the
strategic goal of enterprise profitability, shown on Fig. 1.
Strategy 1
Profitability of the enterprise
Preset profitability of working capital of the enterprise
Reasonable (compromise) policy of current assets
management combined with aggressive policy of
current liabilities management
уппоточнимипасивами
Fig. 1. Scheme of working capital management that is aimed on the achieving
the strategic goal of profitability of the enterprise
During the implementation of this strategy the goal of the enterprise in the
short-term interval is to minimize the amount of total expenditures to finance
current assets, as the evaluation criteria of effectiveness of the enterprise policy in
the process of working capital management. This criterion (Z → min) is
represented as a target function of the mathematical model of linear programming,
which is designed to create the optimal plan of short-term financing of the
enterprise.
Optimal short-term financing plan provides the company achievement its
tactical goal of working capital management, which is in ensuring the optimum
volume of working capital of the enterprise.
Let’s consider working capital management strategy aimed at achieving the
strategic goal of the investment attractiveness of the enterprise (Fig. 2).
Strategy 2
Providing of the investment attractiveness of the
enterprise
High solvency of the enterprise
High level of liquidity of the enterprise assets
Aggressive policy of current assets management combined with
compromise policy of current liabilities management
Fig. 2. Scheme of working capital management that is aimed on the the
achieving the strategic goal of providing of the investment attractiveness of the
enterprise
For any potential investor a sufficient level of solvency is one of the most
important characteristics of the stability of his business. For the enterprise that has
developed a strategy of investment attractiveness of the enterprise it is very
important to have a high level of liquidity of assets.
The proposed system of criteria for assessing the liquidity of assets includes
three factors: current liquidity, quick liquidity and
total liquidity.
To implement this strategy the enterprise must define certain values of
liquidity coefficients that meet the minimum acceptable level of liquidity of assets.
It is appropriate to evaluate the adequacy of liquidity and its changing trends. It
should be borne in mind that unjustified overstatement of liquidity coefficients
reduces the profitability of capital.
The problem of the determination maximum value of the coefficient of
liquidity is closely related to the tactical purpose of the enterprise in working
capital management (WC → max). With the increase of the net working capital
(calculated as the difference between current assets and current liabilities)
decreased the risk of loss of liquidity. Clearly that the interconnection has more
complicated view, as not all current assets influence equally positive on the level
of liquidity.
WCmax to the enterprise will provide by the combination of aggressive
policy of current assets management with moderate policy of liabilities
management.
Then go into detailed consideration of working capital management strategy
aimed at achieving the strategic goal of enterprise financial stability (Fig. 3).
Financial stability of enterprise determines its long-term stability and is
connected with optimization of capital structure of the enterprise [3, sec. 443].
Analysis of the proposed capital structure of the enterprise does with the effect of
financial liverydzh that increase return on equity of the enterprise by attracting
debt capital.
Strategy 3
Providing of financial stability of the enterprise
Optimization of the capital structure of the enterprise
Compromise policy of current assets management combined with
conservative policy of current liabilities
Fig.3. Scheme of working capital management that is aimed on the the
achieving the strategic goal of providing of the financial stability of the enterprise
The implementation by the enterprise the strategy of providing the financial
stability and the combination of the moderate policy of current assets management
with conservative policy of current liabilities management of the enterprise.
Let’s consider the strategy of working capital management that is connected
with an enterprise strategy to expand production from its own sources of formation
working capital (Figure 4).
Strategy 4
Expand of production by the own costs of formation of
working capital
Increase of need of the enterprise in working capital
Deficit of working capital
Compromise policy of current assets and liabilities management
Fig. 4. Scheme of working capital management that is connected with usage of
the enterprise the strategy of investment own costs in the expansion of production
This strategy involves investing own funds in the expansion of the enterprise.
Considering the above strategies of working capital management it can be
built the common table selection of a strategy of working capital management,
directed to the appropriate strategic goal of the enterprise (Table 2).
Table 2
Strategies of working capital management depending on strategic goals
of the enterprise
Strategic goals of the enterprise
Profitability
Strategy of working capital
management
Current assets
Current liabilities
Compromise
Aggressive
Aggressive
Compromise
Financial stability
Compromise
Conservative
Expand of production
Compromise
Compromise
Investment attractiveness
The system of strategic working capital management involves constant review
and adjustments in enterprise strategy according to changes that occur within the
external and internal environment. Based on the priority goals of financial and
economic activities, they may also apply at certain stages of development
different strategies for managing working capital.
Conclusions. Thus, the strategy and tactics of working capital management
should ensure the finding a compromise between the risk of loss the liquidity and
efficiency of work. This is reduced to solve two important tasks:
1) providing of solvency. This condition does not exist, if the company is
unable to pay bills, fulfill liabilities;
2)
providing sufficient working capital volume, rational structure and a
sufficient profitability of working capital.
Thus, in development the policy of working capital management companies
will need to develop a set of measures to ensure liquidity and accelerate the
turnover of certain types of current assets (inventory, accounts receivable, current
financial investments).
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