Plan for the floating capital demand

We explain the planning process of the floating capital demand based on the work of Pupos (2010).

Floating capital is the supply value of certain categories of circulating instruments, that is permanently illiquid to ensure continuous production, so functions as capital. Based on the interpretation of the concept these groups of circulating instruments include:

 Value of the insurance material supply;

 Supply of self-made stocks;

 The determined ratio of claim supplies;

 Insurance funds.

6.3.1. Planning the material demand

The related theoretical knowledge – that we need for the tasks of planning – was included in several different courses. Therefore we only discuss the most important topics, that are emphasized and necessary during the creation of the business plan. Our goal is the synthesize the information discussed before. While observing the correlations we will need related professional knowledge taught before.

Based on previous studies we know, that a majority of the estate of a company is in circulating instruments, that belong to the following categories: supplies, claims, stocks and cash. It is also known that the production process is based on the circulation of floating instruments, it is an essential condition that the different groups of circulating instruments be present together. Within circulating instruments there is a predomination of supplies, the quality of management of these supplies therefore influences the results.

Supplies include:

 Materials;

 Unfinished production and products;

 Young, store and other animals;

 Ready-made products;

 Products;

 Down payment for supplies.

In the following section we will review the planning process of purchased supplies (materials and products, or commercial supplies), since purchasing the materials and products is the basis of all the other types of supplies. But from this it follows, that when planning the amount of materials necessary for a company one has to start with the production plan. We have already covered, that the production plan contains the type and amount of products that are planned as well as the timing of the production. The plan of material needs has to be in line with the granularity, time-related segmentation and timing of the production plan. The importance of this is also supported by the fact, that material costs can only be planned – as part of the financial plan – based on this, and this is necessary for the timing of expenses – included in the plan for the financial turnover.

To create the plan we need to know:

 Tasks of production;

 Norms of using materials;

 The volume of other activities.

During the practical planning process the plan for the material needs is only created for the type of material playing an important part in the consumption. Necessary supplementary materials (subsidiary, fuel, lubricant, heating material, etc.), other than the basic materials can be planned based on the characteristics of the usage. These characteristics of usage are determined by different, simple statistical methods (average calculation, proportioning, etc.).

The total necessary amount of materials is calculated with the series of consumption for the single items of usage characteristics and parameters of planning period. For example if the specific fuel oil consumption is 8 liters/100 km, the planned running performance is 50 thousand km, the total amount of fuel oil needed is 50 000x8 = 40 thousand liters.

The most common usage standards of materials are the following:

 Net material usage standard: this shows the amount of material actually built in the product.

 Gross material usage standard: In addition to the net standard it includes the waste, loss created during production. The implementation of stock materials is based on this.

 Acquisition standard: In addition to the gross standard it includes the specific material usage of excess caused by waste and the specific transportation and storage wastes.

The correlation between the standards explained previously is shown in the graph 6.2.

Acquisition standard

Gross standard + Waste + Other specific losses

Net standard + Junk

Figure 6.2 Correlations between the standards of material usage Source: Own compilation

In practice material usage standards are also expressed in the percentage of gross material usage standards. The basis of comparison is therefore the gross standard, this constitutes a 100%.

The demand for material can be planned by types of materials based on the equation below:

Demand for primary material = Planned production × Acquisition standard

The planned demand for primary materials is the basis of the plan for the direct cost of materials. Based on the correlation already mentioned:

Direct cost of materials = Demand for primary material × Unit price

When knowing the demand for primary materials can we create a plan for the acquisition of primary materials. The planning process can be carried out based on the balance-method.

According to this:

Starting supply + Acquisition = Usage + Ending supply Based on the previous correlation:

Amount to be purchased = Usage + Ending supply – Opening supply

The usage is based on the usage plan. The starting supply equals the ending supply of the previous period. It is more problematic to determine the size of the ending supply. Planning the ending supply usually happens with the help of the average supply. Based on this:

2

supply Flowing

supply Minimal

supply

Ending  

The minimal supply is the level od supplies, which a company cannot go below. The flowing supply covers the demand for materials between two consecutive times of purchases. The minimal supply can be calculated based on the equation below:

Minimal supply = Stock supply + Insurance supply Check questions:

1. What is the resource-scale?

2. What is the difference between capacity and permeability?

3. List at least 5 suggested solutions for a situation where a group of machines turn out to be too tight of a resource!

4. List at least 5 suggested solutions for a situation where a group of machines turn out to be too broad of a resource!

5. What are the mandatory elements of the plan for human resources?

6. Which steps are included in the creation of the workforce-plan?

7. Describe the indicators calculated from the working time balance (name and calculation)!

8. Describe and give a short introduction of the material usage standards and the correlation between them!

9. Describe and give a short introduction of the supply categories!

Competence developing questions:

1. Describe the basic correlations of the planning process of resources!

2. Summarize the tasks that need to be completed during the planning process of material instruments and the correlation between them.

3. Describe the professional aspects of creating the workforce-scale!

4. What kind of factors influence the workforce expenses?

5. Describe the professional aspects that the plan of material needs is based on!