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Circuit of capital: stages, formula. The movement of capital

In various economic schools, the concept of capital is often interpreted in different ways. According to the works of Ricardo, this word indicates a part of the national wealth used in production. And Karl Marx called capital the blessings, which, with reasonable use, allow increasing their quantitative value through investing in production.

Modern concept

Capital is not something individually specific, nor a product, nor finances, but that's what concerns the latter, of course, it happens at the stage when it is launched into production with the purpose of making profit. This is like a completely ordinary form of materialization of property, a kind of money flow of the owner, aimed at obtaining a certain income. Therefore, by the general concept of capital, everything that can bring income is implied. Consequently, it can be means of production, and finished goods, and finance.

Negotiable process

The circulation of capital is the path by which its continuous movement follows through production appeals and spheres, thereby ensuring the creation of surplus value and its new reproduction. In the conditions of market relations, financial investments are considered to be especially important. This is largely due to the fact that they are part of the building category. And this is the very component that transfers its own invested value to the new created product completely, and then returns to the businessman-industrialist in monetary form at the end of each circuit, which in a quantitative ratio will be larger than that invested. From which it follows that working capital was and will be one of the most important criteria in determining the profit of production.

Circuit of Capital: Formula and Stage No. 1

In the course of its movement, capital passes through several stages, the so-called stages, after which it returns to its original form. That is, advancing initially in the form of cash, it passes through three stages of circulation.

The first includes such actions: the capital, which in the formula will be denoted by the letter D (money), is spent by the entrepreneur, that is, the person with finances, on the means of production (labeled Cn), and also on labor (Pc). Both Cn and Pc at this stage of capital circulation are commodities purchased for the organization of production processes of the enterprise. In connection with the fact that to start the activity it is necessary not only the working equipment for which the part of the capital is to be purchased, but also the services of hired employees are also needed, in the formula they are also designated as goods - because of the allocation of funds to pay for their labor.

Stage No. 2

Further, the forms of capital change, "money" (D) becomes "productive" (P). As a result of the functioning of the production process, it then acquires a commodity form (T). Produced goods, of course, are different from those acquired at the first stage, both qualitatively (on the external aspects of the newly created product) and quantitatively (based on the calculated cost of consumption plus the surplus). For example, at the first stage, part of the capital was purchased sewing equipment, materials, etc., and also hired cutters, seamstresses, etc. Well, in the second stage of the P-stage, sports suits were sewn. This example clearly shows the difference between the products of the first stage from the resulting production process.

Stage No. 3

At the third stage, the circulation of the capital of the enterprise again turns into the sphere of circulation: the entrepreneur brings to the market and sells the goods produced there, receiving in money the cost and additional surplus value. In the end result, the invested finances were transformed from the commodity form (T) again into cash (D).

At the third stage, the movement of capital is the sale of production goods to the consumer. Returning back to the treasury along with the surplus value in the form of cash (D) means that its circular movement has come to an end and has arrived in its original form in its original position. Only now the businessman has already a much larger amount of money than before. Then he again starts the circuit and the turnover of capital from one form to another, again conducting it through three stages of circulation. This is the reason for the continuity of the process.

Ensuring continuity

So, from what has been said above, we see that the circulation of capital is accomplished through the passage of three functionally active stages. Where the second, that is productive, is considered the most important, because it is in it that the creation of surplus value occurs. The path of successive passage of each stage changes the forms of capital from one to another. In fact, the movement of capital will not be limited by one single cycle, as the entrepreneur will again and again put the money in motion, having a completely understandable goal - providing himself and his business with an even greater and steadily growing surplus value. And the continuity of the process of production can be achieved if the capital not only goes from one form to another, but will always be simultaneously present in all three forms.

Purpose of Working Capital

The means that serve the process of activity and at the same time participate directly in the creation of new products, and simultaneously in the process of selling products, allow the concept of what working capital is. Its main purpose is to ensure the rhythm and continuity of the process of the financial production cycle. Acquired means of production (Cn) have another name - "enterprise capital". The concept of it as Cn, in turn, is divided into the objects of labor that take part in the creation of commodity products and services (Pc), they also have a functional difference in their participation in the production process.

The principal difference

The peculiarity of working capital is that it is not spent, does not consume, but is advanced to various types of current costs of entrepreneurial activity. The goal of such advancement is the creation of inventories, the construction of unfinished elements of production in order to increase the quantity of manufacturing finished products and to organize even better conditions for its successful implementation.

Investing in the creation of production

Advancement means that the allocated funds for launching into the capital cycle are returned to the production after each completion of the cycle, which includes:

  1. Manufacturing of products.
  2. Its sale to the consumer.
  3. Receipt of revenue from sales.

Simply put, it is precisely from the proceeds from the realization of the produced goods that the advance of the material part is recovered, and specifically, its return to the original (D) value. Thus, it becomes clear what is working capital. It can be described as a combination of financial resources launched for the organization, the establishment of the production process through the use of circulation funds and working capital investment.

Production capital

The means of labor constitute the property content of the main production assets, such as the main part of the finances, workshops, working equipment and other production negotiable instruments relating to the future development policy of the enterprise in order to increase profitability.

Regardless of the division of the enterprise's capital into its own, principal, borrowed, or negotiable, as well as permanent or variable, it is in a constant process of continuous movement, only assuming various forms due to being in a particular stage, through which the current round of cash flows Means.

Means of production

The means of production include objects of labor, including materials, raw materials, components, semi-finished products and the like. All of them participate in the production-technological cycle that makes the circulation of capital, and is fully consumed during the time interval of one such circle. The money spent for this quickly turns around, blocking the cost of living productive labor, creating in the same production cycle of the product.

Measuring speed

One of the important evaluation criteria characterizing the circulation and turnover of capital is the determination of the speed of its movement. The first measurement of speed is the size of the time interval during which the entire amount of money advanced to them returns to the capitalist in the form of revenue, which has increased by the amount of profit. Such a length of time is 1 turn.

The second dimension of the turnover rate of capital is the number of applications of the advanced investment for 1 year. This measurement is derived from the first, calculated by dividing 12 annual months by a time of 1 turn.

Separately taken parts representing the movement of capital in the industrial sphere are distinguished by the individual features of material-material means of production and will be reversed at different rates.

And as for the means of labor, which include structures, structures, machines, machines and other equipment, the period of their functioning ranges from several years to several decades. They are part of the material and technical base of the industrial enterprise and consistently participate in most production and technological cycles.

Target prescriptions

Working capital is required to be maintained at a rate that provides steering optimizing management of production activities. To do this, it is necessary to determine the formulation of attitudes that pursue strategic goals.

For example, the financial and economic characteristics of production are its liquidity, that is, the ability to convert assets into cash in order to pay off payment obligations. Its high enough level for any enterprise is the most important characteristic of stability of activity. The loss of liquidity can result not only in additional costs, but also in the periodic shutdown of the production process.

A low level of capital turnover will not be able to properly support production activities. Therefore, it is possible to lose liquidity, failures in work and, as a result, low profit. For each enterprise there is an optimum level at which the maximum profit is possible.


All the stages through which capital passes, making its circuit, are closely interrelated and dependent on each other. And of course, the second stage has the most crucial metamorphosis in this series. Because it is at this stage that the creative component of the entire process is created, when the goods are produced and a new value is created. And therefore the transformation of capital from the productive to the commodity form is a real transformation of that, in contrast to its metamorphosis in stages 1 and 3, in which there is only a change of form to each other, but there is no increase in capital. It is on this construction of the circular movement of means that the activity of any production is built.

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