Financial stability indicates the company's sustainability and its ability to survive in a competitive environment. It is evidence of the good condition of the company’s resources in the reporting period, reflects the ability of the company to freely and efficiently use its financial resources, while ensuring current production while taking into account the necessary costs of this production.
The main task of managing and managing the company is the ability to ensure its financial stability, to direct activities in the direction of profit.
A company is called sustainable when external factors affect the activities of the enterprise, and it is still able to function normally, fulfill its obligations and goals and objectives.
Financial Sustainability: A Concept
The financial stability of a company is a condition in which its solvency is constant over time, and the capital structure has a rational relationship between resources that are own and borrowed from the company.
Thus, financial stability is characterized by such a ratio of resources in which the company’s activity meets the needs of the market and forms the needs of its development in the future, which is revealed in the process of analysis of the coefficients of financial stability of the enterprise
Analysis objectives
The main objectives in the analysis of the financial stability of the company are:
- the study of solvency and financial stability of the company, the identification of violations and their causes;
- development of recommendations and ways to improve financial stability, liquidity and solvency;
- optimal use of resources and stabilization of activities;
- forecasting future performance indicators and financial stability, depending on the option of correlation between resources in the company.
Key influencing factors
Among the internal factors distinguish:
- costs in the production process, as well as the ratio between the share of fixed and variable costs;
- rational composition of assets and the choice of ways to manage them;
- rational structure of resources and proper management of them;
- the presence of attracted capital. The increase in borrowed capital increases the financial capabilities of the company, but at the same time increases the risk of default on obligations.
When calculating the financial stability coefficients of an enterprise, it is necessary to take into account external factors:
- the impact of the economic situation in the country;
- competition in the market;
- macroeconomic indicators;
- country's policies (principles of economic regulation, land reform, the right to consumer protection);
- inflation rate.
Infobase
Information for analysis is taken from accounting data:
- company balance sheet;
- income statement.
The balance sheet reflects, on the one hand, the existing assets of the company, on the other hand, the sources of their financing. Indicators are shown in monetary terms and can be classified by their composition.
The report on financial results shows the total values of the functioning of the company for the reporting period, as well as the procedure for making profit or loss.
Varieties
The main types can be represented by groups of categories:
- absolute - the company is completely independent of external creditors, since it has a sufficient amount of its own funds;
- normal is the most favorable type of sustainability, because in addition to equity, the company uses long-term loans to expand its activities and development;
- unstable - the company's solvency is violated, but it is possible to restore the balance due to an increase in equity, a decrease in accounts receivable, and also due to an increase in working capital;
- crisis - the company is on the verge of bankruptcy. A complete exit from this state will mean a decrease in the number of stocks and an increase in the sources of their formation.
Main coefficient
The financial stability ratio for the balance sheet is an indicator that estimates the structural share of equity in the total amount of all funds of the company. It reflects the quotient of dividing own funds by the total balance for a certain period. A high ratio indicates financial stability and independence of the company from external lenders. For this indicator, the minimum acceptable level is 50-60%.
Financial stability ratio and calculation formula
After considering the general idea of this indicator, we will move on to the study of methods for its determination.
The calculation of the studied coefficient is made according to the formula:
KFU = (line1300 + line1400) / line1700.
The formula in another form will look like this:
KFU = (SK + DK) / P,
where KFU is the financial stability ratio ;
SK - equity, including available reserves;
DC - long-term loans and borrowings (liabilities), the term of which is more than 1 year;
P - general obligations (otherwise - the balance sheet currency).
Normative
The regulatory coefficient of financial stability is in the range from 0.8 to 0.9.
A ratio value in excess of 0.9 indicates the financial independence of the company. In addition, this value indicates that the analyzed company will be characterized by an increase in solvency indicators over a long period of time.
If the investigated financial stability ratio is below the norm of 0.75, then this situation should be a very alarming signal for the company. It may indicate a risk of permanent insolvency of the company, as well as its financial dependence on creditors.
Other indicators of financial stability
You can consider a number of factors:
- The concentration ratio of borrowed capital is defined as the difference between the value of "1" and the coefficient of autonomy. Enterprises with a high level of equity attract creditors more intensively, because investors believe that they can return their investments from these own sources of the company.
- The coefficient of financial dependence is opposite to the coefficient of autonomy.
- The maneuverability coefficient of capital describes that part of it, which is aimed at conducting current activities. Its growth is welcomed: the higher, the better financial stability.
- The ratio of borrowed and own funds. Shows which part of the company’s funds is larger: own or borrowed. The ratio is higher than 1 in a situation where the company depends on the loans of the company.
- The ratio of current assets own working capital. The optimal value should be equal to or greater than 0.1.
Directions for improving financial stability
In market conditions, the key to survival and the creation of a stable financial system of a company is its stability. Sustainability shows such a situation of the company's resources, under which it is possible to freely maneuver money, use it efficiently, ensure a continuous production process and sales of goods, and take into account the costs of expanding and updating the business. The financial stability ratio and its calculation formula affect the stability of the company’s system.
Financial stability is determined by both the stability of the economic environment in which the company operates, and the results of its activities, adaptation to changes in environmental factors.
Opportunities for strengthening the company's finances may include the following areas:
- an increase in the authorized capital through the issue of shares and the accumulation of retained earnings (applicable if the company does not bear uncovered losses during the analyzed period, otherwise it cannot produce concrete results);
- developing a smart fundraising strategy;
- revising the value of stocks of products; overloading with stocks negatively affects the stability of the company, it is necessary to get rid of excess stocks;
- an increase in the volume of work to collect receivables, which leads to an increase in the share of the company’s cash, accelerating the turnover of capital;
- acceleration of receivables turnover and, as a result, more rhythmic receipt of funds from debtors;
- increase in "safety margin" in terms of solvency indicators, etc.
Therefore, in order to improve the financial stability of the enterprise, it is necessary to find reserves to increase the rate of accumulation of own sources, providing tangible working capital with resources that are in personal possession.
Conclusion
A study of the financial stability category of a firm is a very important analysis. We can only talk about the stability of the company only in the situation when its income exceeds the expenditure side, which is revealed in the analysis of financial stability ratios. In the case when the company freely manages cash, if the process of production and sale of products is established, then such a company is likely to be classified as normal stability. Moreover, the values of financial stability ratios will comply with the standards.
Knowing the current state of financial stability of the company will help draw up a financial and business plan for the forecast year. In addition, the company will be able to competently build its credit policy in accordance with the objectives and current financial situation.