What Is a Statutory Liquidity Ratio?

Working capital, also known as "working capital", "working capital". The working capital that accompanies the investment in fixed assets is an important part of the total investment estimation in the preliminary work of engineering investment projects. For any project to be successfully put into production after the completion of construction, it must have sufficient liquidity necessary for the normal operation of the project. However, because the working capital is invested in the production period, it is often ignored or adjusted in order to control the total investment scale during the construction period.

Project liquidity

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Working capital, also known as "working capital", "working capital". The working capital that accompanies the investment in fixed assets is an important part of the total investment estimation in the preliminary work of engineering investment projects. For any project to be successfully put into production after the completion of construction, it must have sufficient liquidity necessary for the normal operation of the project. However, because the working capital is invested in the production period, it is often ignored or adjusted in order to control the total investment scale during the construction period.

Project liquidity Therefore, it is very important to pay attention to the reasonable estimation and active financing of liquidity in the preliminary work of engineering investment projects.

1. Composition of liquidity of engineering investment projects

In the preliminary work of engineering investment projects, simplified methods are generally used to estimate working capital. Here, liquidity is the difference between current assets and current liabilities. Current assets include inventory, cash, and accounts receivable. Current liabilities only consider accounts payable.

Inventory mainly includes reserve funds used to reserve raw materials, fuels, spare parts, spare parts, etc. to ensure normal production needs, production funds occupied by raw products that are in the process of production under normal production conditions, and after the finished products are put in storage and before sales Finished product funds occupied by finished products in a period of time. Cash refers to the portion of funds that stays in the form of money in the production and operation activities of the enterprise, including corporate cash inventories and bank deposits. Accounts receivable are generally calculated only for sales receivables. Accounts payable mainly refer to the original purchase on credit

2. Estimation method of liquidity of engineering investment projects

According to the specific situation of the project, the project proposal stage generally adopts the expansion index method, and refers to the ratio of working capital of similar projects to sales revenue, operating costs or fixed asset investment, or the amount of working capital of similar projects to estimate the working capital. The pre-feasibility study and feasibility study stage generally adopt the itemized detailed estimation method, that is, the non-fixed working capital is estimated according to the inventory, cash, accounts receivable and accounts payable occupied by the project, respectively. The estimation formula is:

Turnovers = 360 days / minimum required days

Accounts receivable = annual sales revenue / turnover

Inventory by item: each purchased raw material, fuel = annual purchased raw material, fuel cost / turnover

Work in progress = (annual production cost-annual depreciation charge) / turnover

Finished product = annual operating cost / turnover

Cash = (Annual Wages and Welfare + Annual Other Expenses) / Turnover

Other annual expenses = annual manufacturing expenses + annual management expenses + annual financial expenses + annual sales expenses-of the above four expenses (annual salary and welfare expenses + annual depreciation expenses + annual maintenance and simplicity expenses + annual repair expenses + annual interest expenses)

Accounts payable = (annual purchase of raw materials, fuel costs + annual purchase of power costs) / turnover

It should be noted that the raw material, fuel and power costs involved in the estimation of working capital should include VAT input tax, and sales revenue should include output tax. When using the tax-exclusive price for financial analysis, the taxable price should be adjusted first, and then the working capital should be estimated.

The general calculation formula for accounts receivable is the annual operating cost divided by the minimum turnover of accounts receivable, but the former State Planning Commission's "Guidelines for Feasibility Study of Investment Projects" advocated dividing annual sales revenue by the minimum turnover of accounts receivable. The reason is that the estimated working capital when using the annual operating cost as the denominator is too low to meet the actual needs of the project in the future.

The minimum number of days required for each sub-item in the working capital estimation shall be based on the average turnover days of similar enterprises and the characteristics of the project.

The minimum number of days required should include: days in transit, average supply interval days * supply interval coefficient, acceptance days, finishing preparation days, and insurance days. In the same project, the minimum required days for general accounts receivable should be greater than the minimum required days for accounts payable.

Materials, fuel, and accounts payable.

3.Estimated proportion and composition of early working capital of petroleum and chemical projects

In the preliminary estimation of petroleum and chemical projects, whether it is an extended index estimation method or a detailed itemized estimation method, the estimated working capital of the project will generally account for a certain percentage of sales revenue (including tax).

Refining industry project liquidity accounts for a high proportion of sales revenue (including tax), generally about 18-20%; fertilizer industry projects liquidity accounts for a high proportion of sales revenue (including tax), generally about 13-15%; other chemical industry projects The ratio of working capital to sales income (including tax) is about 10%.

The occupation of working capital in petroleum and chemical industry projects is mainly affected by industry characteristics. For example, in the refining industry, inventory is the main component of working capital. The working capital occupied by crude oil, raw oil and oil products cannot be ignored, so that the working capital occupied by the project is relatively high. The pesticide industry and fertilizer industry are greatly affected by seasonal production, and accounts receivable and inventory need to occupy a certain amount of working capital. In general, inventories and receivables are the main items that occupy liquidity.

Enterprise dependence will also affect the estimated proportion of project liquidity. For example, if an enterprise expands its scale on the basis of the existing market, the sales channels are unblocked, raw materials and fuel are supplied by the old factory (or related party), and products are sold to the old factory (or related party), etc., it will reduce the project's working capital occupation. The allocation of enterprise resources, the degree of vertical integration of related enterprises, and the proportion of fixed costs in costs will also affect the amount of working capital, which should be analyzed on a case-by-case basis.

In the preliminary estimation of investment projects, the working capital estimation can refer to the overall forecast of the working capital of industry enterprises, but should not be based on the amount of instant or short-term working capital. Because with the changes of the market, the company's actual business process often results in products selling well and slow-moving, which is directly reflected in fluctuations in working capital. It is unscientific to estimate the working capital required by a company for a project based solely on its working capital occupancy at a certain point in time.

4. Estimation of working capital in the preliminary work of engineering investment projects from different perspectives

Different people have different opinions on whether the working capital should be invested, and what standards should be used for working capital in the process of investment estimation.

From a macro perspective, the relevant state departments stipulated that the investments subject to project approval control (commonly known as reported total investment) include construction investment, interest during construction, and floor capital (30% of working capital).

From the perspective of financial analysis, working capital is the capital investment of the project, and its occupation should be included in the financial evaluation system.

From the perspective of an enterprise, the attitude of domestic enterprises to working capital often depends on the attitude of the relevant departments or higher-level institutions to the total investment control of the project. If there is no limit on total investment, the estimation of general working capital can be normally estimated according to the usual method of estimation; if there is a limit on total investment and there is no room for reduction in construction investment, the project is reported in order to submit the project. Less ", without considering project risks based on their own financing capabilities and project characteristics. Some approvers (or appraisal agencies) tend to pave the way for working capital to be submitted for approval. The total investment should even be considered more fully. They think that the approval of the project itself should be responsible to the project and the owner, and it is necessary to consider it thoroughly. Institutions) may or may not want liquid funds to invest in the scale. They consider that the approved projects are responsible for the construction investment that will form the fixed asset part of the project in the future. The raising of liquid funds is a matter of the company's own financing and management. Evaluation is irrelevant. For example, the amount of working capital required for refining projects is very large. As an existing project legal person, PetroChina believes that its financing capacity is sufficient to solve the problem of working capital financing when the project needs it, and it is unwilling to bear the swelling only because of working capital when the project is approved. Up the scale of project investment.

From the perspective of the bank, as a creditor, the bank is concerned about the debt repayment ability of the enterprise. Generally, when applying for working capital payment, enterprises need to provide guarantee or collateral (pledge) items that meet the guarantee conditions. For enterprises with strong economic strength and good reputation protection, we can provide credit payment. In terms of working capital loans, a one-year renewal loan and an interest calculation method based on short-term borrowing rates are generally used, although the company actually occupies this part of the funds for a long time.

From the perspective of foreign investors, the foreign party is not optimistic about the current situation of China's liquidity. In the preliminary estimation of a Sino-foreign joint venture project in Shanghai, the foreign party insisted that the minimum number of days required for accounts receivable is 90 days, which is considered to be a realistic conclusion drawn from a survey in China.

The consultants working on the current issue of the matter, on the one hand, pay attention to the reasonable estimation of liquidity, and on the other hand, if the owner has special requirements, they will adjust the estimated amount of working capital within the allowable limit, especially if the owner has unilaterally In the case of reporting the project and obtaining investment approval. The consultants will not deny the feasibility of the project because of liquidity reasons. They can only give advice to the owner, pointing out the actual amount of liquidity needed and the importance of timely financing, so that they can correctly understand and fully prepare. This is understandable. However, it should be clearly recognized that working capital is necessary to ensure the normal operation of the project. It is not out of nothing, nor can it be adjusted arbitrarily. The working capital estimation cannot be used as a lever for adjusting the total investment estimation. It should be given full attention and reasonable estimation.

5.Influencing factors of project investment project liquidity estimation and financing

As mentioned earlier, industry characteristics, project characteristics, enterprise reliance, corporate affiliation, relevant state departments' control over the total investment of the project, and the attitude of the owner will all affect the estimation of working capital to a certain extent.

The financing ability of an enterprise is one of the main factors determining the financing of liquidity. Generally, the financing channels of enterprises with strong strength and good credit guarantees are unblocked, and raising liquid funds is not a problem. SMEs may not. In foreign countries, SMEs can rely on business credit loans; in China, SMEs cannot rely on goodwill loans alone.

Industry prospects and project prospects are also factors that affect corporate financing. Companies with promising industry and project prospects are more likely to raise funds. For example, popular high-tech companies tend to raise funds more easily. Companies with average industry prospects and project prospects may not have sufficient persuasive power to obtain funds, such as mining enterprises. One of the reasons for the difficulty of some large-scale key phosphate fertilizer companies in China is the lack of necessary working capital.

National policy tilt is also a determinant of corporate financing. Such as the current real estate industry.

In addition, under the circumstances that Chinese enterprises generally lack their own funds, the capital market is still incomplete, and the company's dependence on banks is quite large, national macro financial policies will directly affect the financing capacity of enterprises, and of course, it also includes the financing of liquidity ability. Proactive monetary policy will make it easier for companies to raise funds, and it will be more difficult for companies to raise funds when they encounter austerity.

6. Discussion on the term of "liquid funds"

The term liquidity has historically been controversial in academia and engineering consulting. Whether the word "flow" should indicate the part of funds that often changes during the production and operation of an enterprise is the focus of controversy.

One view is that "liquidity" in the traditional sense is translated from English "Working Capital", meaning funds that make fixed assets work. From its general scope, it refers to the working capital used by enterprises in the production and operation processes to purchase raw materials and fuels, reserve commodities, and pay wages. And this part of the funds is exactly the most basic working capital long-term occupied by the enterprise to ensure normal production. Unless bankruptcy and liquidation, these funds can never be separated from the production process of the enterprise, but only fluctuate with the production and operation of the enterprise. Therefore, this part of the funds should be treated and treated as long-term funds, and accordingly referred to as "working capital" or "working capital". The new accounting system defines it as "working capital."

Another point of view is that the term liquidity has been accepted by a large number of users in practice, including financial institutions such as banks, general industrial and commercial enterprises, project approval agencies, and engineering consulting departments, which represent those corresponding to long-term investments. The portion of funds used for raw materials, fuels, commodities, etc. that are relatively changed relative to fixed assets. This term has a special meaning in the early work area of the project, not to mention that at present China's financial institutions also use this method of renewing loans once a year and calculating interest at short-term interest rates. In addition, since the terms "current assets" and "current liabilities" are acceptable, it is logical to call the difference between current assets and current liabilities "current funds". However, it should be noted that the current assets and current liabilities in the balance sheet of an enterprise's financial statements cannot be simply used to estimate the working capital of investment projects.

Whether the term liquidity exists in the early stage of construction investment projects is still controversial and needs further discussion.

7. Summary

As an important part of the capital necessary for project operation, working capital should and must be given widespread and full attention by project approvers, financial institutions, owners, and the engineering consulting community.

The reasonable estimation and timely and full financing of the working capital are the guarantee for the functioning of the fixed assets. Although different project related parties have different attitudes towards working capital from different perspectives, the smooth operation of the project is a common concern and expectation of all parties and should be coordinated to jointly promote the operation of the project.