A clear indicator of the financial viability of an enterprise is its liquidity. This term means the unconditional stability of the company in any socio-economic circumstances. Such indicators are important for each business representative, whether it is a company or a private entrepreneur.
The liquidity analysis algorithm of the enterprise
The term originated at the beginning of the last century. The origin originates from the German language. The literal meaning is reduced to the concept of "fluidity". Translated into the economic plane, one can figuratively explain how the ability of a company's material assets to easily turn into money and vice versa (in the narrow sense).
The analysis of the liquidity of the enterprise in theoretical terms has many interpretations. Russian law is no exception. Details and nuances are described in the federal law on insolvency. In this context, the explanation is repelled from the opposite. So, according to the law, a company is considered illiquid, which has formed accounts payable for 3 consecutive months, and the amount of the debt exceeds 100 thousand rubles.
When is it done?
An analysis of the liquidity and solvency of the enterprise should be organized in the following cases:
- To assess the effectiveness of the use of credit funds.
- To control the implementation of contractual obligations to partners.
- To make forecasts on the financial condition of the company.
- To increase the confidence of investors or partners.
The liquidity analysis of an enterprise as a procedure is guided by two types of data: on assets and on liabilities. If there are additional statistics related to the activities of the enterprise, then this will only improve the result. All reliable information characterizing the activities of the company should be used.
Analysis of the liquidity and solvency of the enterprise in Western countries, but with a tendency to spread to other countries, began to be carried out more often. So, the procedure has become almost mandatory when it comes to the relevance of the following issues:
- How long will the company be able to repay all existing liabilities?
- The ability to close current debts.
- How soon can liabilities with short maturities be closed?
To answer each question posed, an analysis of different indicators will be required. But enterprise liquidity analysis revolves around assets and liabilities. Therefore, they deserve special attention.
Types of assets
Assets are divided into four types:
- assets requiring difficult methods for their implementation;
- slow liquidity assets;
- receivables from receivables and other types of quick assets;
- money in the company's own accounts, including investments for short periods.
The analytical document takes into account indicators at the beginning and at the end of the period. Separate row and column highlight the difference between them. The final figures have a characteristic with a minus or plus sign, which are indicators of trends in this position.
The total data is reflected on the line “Balance” at the end of the document.
Types of Liabilities
Liabilities are also divided into four types:
- long-term loans and borrowings;
- permanent liabilities;
- accounts payable and other types of urgent payments;
- short-term liabilities, including loans and borrowings.
An enterprise liquidity analysis is considered positive if the assets of the first type are equal to the liabilities of the second type or the assets of the second type are more voluminous than the liabilities of the second type. A good result when these indicators are equal to each other.
Indicators
The theory of financial analysis operates with such an important term as current or long-term solvency. She is also one of the priority indicators of the enterprise. But all these factors are considered within the company's ability to turn assets into money. So, by what indicators can an enterprise be considered liquid?
- Quick ratio To determine it, the receivables should be summarized, investments for short periods and money on the balance sheet and the amount received should be divided by the amount of the obligation with short periods.
- Net working capital. To find this indicator, it is necessary to subtract the amount of short-term liabilities from the volume of current assets.
- Indicators of total liquidity. This indicator is found by dividing the amount of funds in circulation by the volume of short-term obligations.
- The absolute turnover ratio is the result of dividing the amount on the balance sheet by short-term liabilities.
What is current solvency?
Under current solvency is meant the potential of the enterprise, sufficient to cover short-term obligations at any time. In other words, a company can be attributed to solvent organizations if it knows how to successfully raise working capital to cover current liabilities.
If fixed assets were not purchased in order to resell them in the future, then they cannot be considered as means for repaying short-term obligations. There are two reasons for this. Firstly, they occupy a special functional role in production, and secondly, it is difficult to implement them urgently. At the same time, it is important to clarify that they do not mean such options for fixed assets as passenger transport or design items from the office interior, which are highly attractive among consumers.
Analysis of the liquidity of the balance sheet of the enterprise shows that the current level of solvency is determined by the level of turnover of current assets. That is, how easily and quickly they can be turned into cash. Evaluation of quality indicators and potential opportunities involved in another procedure - analysis.
Relationship and Roles
If the enterprise was presented as a multi-storey building, then its floors would be: balance sheet liquidity level, leading indicators of the company itself and solvency. That is, these indicators play an equally important role in the activities and development of the enterprise. Passing one, it is impossible to obtain reliable data on other types of indicators. But the basis of the basics are balance sheet indicators. This indicator directly proves the company's ability to maintain solvency.
If we are talking about assets, then here we should literally understand the ability of this asset to turn into cash in a short time. It is important to note the term, since the shorter it is, the higher the liquidity ratio. The reverse case is the lack of solvency. Up to this level of companies, a number of stages go through in which there is an increase in temporary financial problems. According to the Russian current bankruptcy system, this phenomenon can serve as the basis for recognizing a company as unsustainable. The way out of this situation is the optimization of working capital management. They should be aimed at reducing the level of short-term and long-term liabilities.
The analysis of the liquidity of the balance sheet of the enterprise considers this property and solvency as factors close in value, but gives priority to the first indicator. The level of solvency depends on the level of liquidity, and their relationship develops in direct proportion. The second property provides not only a stable current position, but also confident prospects. Solvency in this regard is a little powerless, since the company can have money for today, but not have it tomorrow.
Main tasks
Analysis of the liquidity balance and solvency of the enterprise has its goals, the most important of which is to obtain reliable information. Even more important is the accuracy and objectivity of this information. Of course, we are talking about information regarding the financial performance of the enterprise.
If we classify all the tasks, we get the following system:
- Obtaining reliable and objective information about the financial affairs of the company, studying weaknesses and strengths, as well as identifying problematic factors.
- Finding ways to improve financial performance and increase liquidity.
- Formation of instructions and methods aimed at the efficient management of financial resources.
- Other measures leading to the strengthening of the financial condition of the company.
- Forecasts on possible options for the development of financial issues and development of plans for each case.
The analysis of the balance sheet liquidity and solvency of the enterprise should ultimately provide complete and reliable information about the current level and prospects for the near future. From this point of view, two types of analysis are important: internal and external.
Internal analysis is aimed at finding methods to create sustainable cash flows and at stabilizing the ratio of own and borrowed capital. External analysis is initiated by credit institutions, counterparties or investors. Its purpose is to identify the prospects for investment in this company.
Analysis of financial stability and liquidity of the enterprise considers the balance sheet, information from analytical accounting and accounting reports as the main source of information. The balance sheet essentially provides information about the assets and liabilities collected in a table.
Important sections of the balance sheet
As already mentioned, the basis of the analysis is information from the accounting documentation. In particular, the analysis of the liquidity and stability of the enterprise requires a detailed study of sections 3.4 and 5. The third section contains information on the volume of equity. The fourth and fifth are an essential part of the information. They reflect:
- Loans received in the country or abroad. Long-term loans are treated separately from non-current liabilities. The first type includes loans for up to 1 year, everything else is reflected in the second group.
- Loans received within the country and abroad. This does not include bank loans. Loans are also classified by maturity: settlement period of up to 1 year and more than 1 year.
- Debts to the budget. For information are taken those that were formed as a result of technical processes: there is a difference in the date of accrual and payment.
- Debt to contractors and suppliers, which was also formed due to the difference in the dates of operations.
- Debt and liabilities for wages.
- Payment obligations to insurance bodies.
- Debts to security agencies.
- Other debts.
Analysis and assessment of the liquidity and solvency of the enterprise has the greatest chance of reliability if the balance sheets are formed correctly.
Difficulties and nuances
Experts note some nuances that complicate the work of auditors. For example, this is a mismatch of the content of accounting data with the goals and objectives of financial analysis. Standards play a role. For example, almost every company has difficulty trying to bring accounting data, legal framework and IFRS rules into a common denominator.
The reason is that the legal framework is often changing. In the same way, reporting forms change annually. All this, of course, leads to an improvement in the qualitative indicators of the analysis. However, in practice this is not always the case. Volatile data give heterogeneous results, and some indicators are not comparable.
Another problem of the information base is the assessment of data taking into account the current level of inflation. Experts believe that domestic accounting systems and IFRS do not converge in terms of the reliability of the information. From this point of view, the analysis of the financial liquidity of the enterprise cannot guarantee the absolute reliability of the results. For example, the inflation rate varies annually within 12-14%. And companies make information based on current prices, since in the domestic system there is no method for evaluating balance sheet items at the market price.
Analysis methods
Analysis of liquidity indicators of an enterprise can be carried out in one of several of the following areas:
- the study of cash flow within a specific reporting period;
- studying data from balance;
- determination of financial ratios.
Depending on the potential for circulation, assets are classified according to the following system:
- A-1 - current assets and short-term investments.
- A-2 - goods that can be sold in the near future, as well as receivables repayable within 1 year.
- A-3 - slow-moving assets.
- A-4 - assets for the implementation of which it takes a long time.
Types of Liabilities
An analysis of the liquidity of an enterprise’s assets requires a classification of liabilities by maturity in an increasing order:
- P -1 - urgent liabilities that do not tolerate deposits.
- P-2 - loans and loans with moderate terms.
- P-3 - obligations for a long period.
- P-4 - equity of the company.
The balance is considered liquid if the analysis of the liquidity ratios of the enterprise gave approximately the following results:
- Assets of the first group are more than liabilities of the first group.
- Assets of the second group are more significant than liabilities of the second group.
- Assets of the third group are more than liabilities of the third group.
- The assets of the fourth group are less than the liabilities of the fourth group.
New method
In addition to the main indicators, the liquidity analysis of the financial condition of the enterprise also considers additional indicators. Among them, one can note the maneuverability of fixed assets, the proportion of fixed assets and their share in stocks. You should also consider the coefficient of coverage of stocks, by which you can determine the source of funds for the purchase of new materials.
In recent years, experts are increasingly using the EBITDA system. Under this term it is understood the ratio of debt to income base before taxes.
This system for assessing and analyzing the liquidity of an enterprise recommends its own method of increasing the solvency of a company - drawing up a payment calendar with details. Such a calendar will help to constantly see the amount of remaining funds and expected revenues for the same period.
Performance Tips
On the basis of any progress is the tightening of financial discipline. One of the simple tools in this matter is the conclusion of collection agreements. If counterparties allow delays or delays in payments, then according to the terms of the contract they will be charged fines. This approach will help speed up cash flow. The method is not without flaws. Firstly, such conditions should be prescribed in a typical contract. Secondly, not all counterparties can agree to such conditions.
It is also important to consider that the cost of the bank’s services for this operation should be commensurate with the income received from such operations.
If we further consider an example of an analysis of the liquidity of an enterprise, then the following conclusions suggest itself:
- The increase in working capital on the balance sheet.
- Reducing the share of stocks of goods and raw materials.
- Change in capital structure. If the amount of borrowed money in liabilities is greater, then this is a direct threat to liquidity.
- Increase profits. Each company has its own method, depending on the type of activity. A universal tool - increasing investment in marketing.
- Affect the status of receivables: revising the terms of the contract, renegotiation in the form of collection with the bank.
Conclusion
According to experts, the best method to achieve and maintain liquidity is to constantly monitor the processes in the company. In addition, we must not forget to periodically check all the information. Priority areas:
- indicators of financial stability;
- cash flow control level;
- solvency control;
- maintaining a high level of business activity;
- generation and increase of equity.
If solvency tends to decline, then the company will need to sell part of the property.
Borrowed funds help out at critical moments, but they should not be abused, because in the long run the company loses. The best way is to increase assets by simultaneously selling unused property and focusing on collecting receivables.
But the rules may differ depending on the type of specialization of the enterprise. But the overall system remains unchanged. , .