Capital and Current Financing of Enterprises

Capital financing of enterprises is the process of meeting the needs of business entities in cash for simple and extended reproduction of fixed assets.

Through capital financing, capital investments are made, which are long-term costs for construction and installation work, the purchase of machinery, equipment, inventory, and other capital works. Capital investments ensure the reproduction of fixed assets in a pre-selected form and composition and are evaluated in terms of comparing the final production result with actual costs.

With the implementation of capital construction in the form of new construction, reconstruction, expansion and technical re-equipment of existing enterprises and non-production facilities, the acquisition of fixed assets, land plots and nature management facilities, intangible assets, long-term investments are associated, the receipt and rational use of which requires the use of special ones agreed with the investor, investment design techniques.

Capital investments are made from such sources as:

• accumulated general financial resources of the enterprise in the form of retained earnings, which can be used by the decision of the owners to increase the fixed capital;

• special funds for the accumulation (development) of enterprises, which are created from profits to solve predetermined tasks that require capital investments;

• additional own funds, which are formed by placing new titles of ownership, such as shares, between the previous owners (closed subscription), new owners (open subscription), or both:

• resources of financial and credit organizations through a special kind of borrowing - long-term loans;

• resources of other enterprises, organizations (including financial and credit) and individuals by placing targeted or, less often, general long-term loans of the enterprise;

• means of state budgets and off-budget funds in the form of targeted financing, including targeted and tax credits.

Current financing of enterprises is the process of meeting the needs of business entities in cash to ensure the normal (planned) course of production and economic activities.

Through current financing, settlements are made with suppliers of material and technical resources (mainly working capital assets), with the personnel of the enterprise (payment of wages) and with the state (payment of taxes and other obligatory payments).

The fundamental source of current financing is the income of the enterprise, however, since payment and shipment of manufactured and purchased goods, products, works and services do not coincide in time, the enterprise has receivables or payables. Part of such debt inevitably arises: it is, first of all, advance and security payments, as well as a possible violation of payment and settlement discipline, leading to the appearance of overdue debt.

When the supplier provides the buyer with an installment plan for payment for shipped products, as well as delays in payments, shortages, embezzlement and theft, damage to valuables, receivables arise. Late payment of invoices for shipped products, work performed and services rendered leads to the fact that manufacturing enterprises divert a significant amount of their own working capital from turnover for an indefinite period.

To cover receivables at the expense of balance sheet profit, provisions are created for doubtful debts: for debts that are not repaid on time and are not secured by legally valid obligations or guarantees. When writing off unclaimed debts, previously recognized as doubtful, from the balance sheet of the enterprise, the amount of the created reserve in correspondence with accounts for accounting for settlements with debtors is reduced.

When adding unused amounts of reserves for doubtful debts to the profit of the year following the year of their creation, the amount of reserves decreases and the amount of taxable profit increases. The created reserve for doubtful debts serves as a source of replenishment of working capital advanced in operations for the sale of goods, products, works and services. The size of the reserve fund is set either in the form of a certain percentage of the amount of debt corresponding to the share of doubtful debts, or in the form of deductions for each debt.

Since in a number of cases the diversion of funds into accounts receivable arising from settlements for shipped goods, products, work performed and services rendered leads to untimely transfer of payments to the budget, taxpayers may be subject to measures of indisputable collection of arrears on payments to the budget in the form of an appeal collection of amounts owed to the debtor from his debtors.

Each enterprise is obliged to keep records of overdue receivables, quarterly draw up a list of debtor enterprises and submit it to the tax authorities as an appendix to the balance sheet. The enterprise-arrears submits to the tax authority an application for the collection of payments to the budget from debtors in the amount of arrears not exceeding the overdue receivables, and an act of reconciliation of the amount of this debt.

The tax authorities at the place of registration of the enterprise-arrears check the ability of the debtor enterprise to make payments to the budget of the enterprise-arrears on account of overdue receivables and issue a collection order for the indisputable collection of amounts due to the debtor on his payments to the budget from his debtors in an amount limited the amount of arrears on payments to the budget, accrued fines and penalties for late transfer of payments. If the enterprise-debtor refuses to submit to the tax authority an application for the collection of payments to the budget from the debtor, the tax authority may, at its own discretion, establish and verify the existence of receivables and write off the funds from the debtor enterprise in an indisputable manner with notification of the enterprise-debtor.

Upon receipt of an installment payment from the supplier, as well as in case of untimely payment for the received goods, products, works and services, the payer has an accounts payable, which means the use of attracted funds of the supplier enterprise in the economic and financial activities.

Accounts payable arise from settlement documents, the due date for which has not come, for settlement documents that have not been paid on time, for goods received but not paid for, for settlements with the budget for accrued taxes and fees, and for some other reasons.

Accounts payable refers to short-term liabilities of enterprises. The ratio of current assets and short-term liabilities is the ratio of current assets coverage, calculated as the ratio of the average amount of current assets to short-term liabilities in the analyzed period. An enterprise with small inventories and marketable securities may have a much lower working capital coverage ratio than an enterprise with a large share of current assets in inventory.

The elimination of the causes of unmanageable debt is facilitated by the reform of the banking system, the development of bill circulation, the clearing service system, the promotion of long-term investments and the productive use of banks capital.