Today, the issues of analysis and methods for assessing the solvency of an enterprise are becoming particularly relevant. This is due to the difficult economic situation in the country, difficult economic conditions, and a large percentage of bankrupt enterprises and organizations. The values of these indicators are also relevant in the process of predicting the future state of the company, since it is this analysis that allows us to draw conclusions about the company's prospects in the near future and the possibility of improving weaknesses.
In Russia, there are a large number of enterprises that are unprofitable or unprofitable. As a result, companies need sources of financing, which is enhanced by the depreciation of working capital due to inflation processes.
The growth of the company's equity is not always positive for the company. If the growth of current assets is accompanied by a simultaneous increase in the amount and amount of debt of debtors, then the balance of finished products increases, unused stocks increase. In this case, the company must finance its activities at the expense of profit. It turns out that the company's profit does not fulfill its main function - it is not used to increase the value of the company in the market.
Relevance
The study of company reporting is necessary for all subjects of economic relations. According to reports, the founders and owners of the company draw conclusions about the options for withdrawing income from investments in the organization, suppliers and buyers - they assess the stability of commercial relations, determine the ability of a partner to fulfill obligations in full and on time, lenders predict the solvency of the organization when assessing the likelihood of bankruptcy when providing them with loans funds.
So, according to the Russian Statistical Yearbook, the current liquidity ratio of Russian enterprises amounted to 88.9% in 2016 with a regulatory restriction on this ratio of ≥ 200%. Last year, the value of the studied coefficient on average in the country decreased to 87.1%. And this means that the bulk of Russian enterprises are insolvent and are experiencing an unstable situation (crisis). The Ratio of own working capital assets demonstrates the same trends. Its value is: -17.4% and -16.5% in 2016 and 2017, respectively. That is, at enterprises there is a lack of current funds from a number of own channels. Today, solvency ratios are very important indicators of a company's financial condition.
In connection with the foregoing, maintaining solvency at the proper level becomes one of the cornerstones in the process of analytical procedures. Analysis and assessment of the solvency of the enterprise is very relevant today.
Low liquidity of the company provokes the insolvency of the organization, a shortage of funds to support economic activity and, ultimately, financial instability and bankruptcy, and excessive liquidity will hamper development, which will lead to the appearance of overestimated reserves, an increase in the time of capital turnover, and a decrease in profit.
The accuracy of the financial diagnostics of the company completely and completely affects the effectiveness of the financial management of the company.
Liquidity and solvency: concept
One of the indicators that characterizes the financial condition of the company is the assessment of the solvency of the enterprise.By it is understood the ability of a company to pay off its cash liabilities in cash on time. Analysis and assessment of the liquidity and solvency of the enterprise is possible in the study of liquidity ratios of current assets.
Balance sheet liquidity
The study of balance sheet liquidity and assessing the solvency of an enterprise is based on a methodology for comparing a company’s asset, grouped by the degree of liquidity reduction and liability, which is grouped by the degree of urgency of paying off liabilities. These two blocks must be compared with each other. The table model shown below will help.
The company's balance sheet can be considered liquid if the following relationship indicators are met:
BUT1, BUT2, BUT3, BUT4
| Asset groups | The procedure for determining the indicator | Liabilities | The procedure for determining the indicator | Surplus funds or lack of funds |
| BUT1 liquid | balance sheet p. 1240 + 1250 | P1 the most urgent obligations | p. 1520 balance | column 2 column 4 |
| BUT2 quick feasibility | balance sheet p. 1230 + 1260 | P2 short-term company debts | p. 1510 + p. 1540 balance | column 2 column 4 |
| BUT3 slow feasibility | balance sheet p. 1210 | P3 long-term company debts | p. 1400 balance | column 2 column 4 |
| BUT4 difficult feasibility | balance sheet st. 1100 | P4 standing commitments | p. 1300 balance | column 2 column 4 |
| Balance | Total balance | Total balance |
Liquidity ratios
There are many liquidity assessment ratios; their calculation in this study was determined on the basis of generally accepted calculation methods.
Each of the coefficients has a recommended value or development trend, deviation from which indicates a violation of the solvency of the company. Methods for assessing the solvency of the enterprise are diverse. Consider the most popular of them.
The calculation of these indicators of assessing the solvency of the enterprise, according to the method proposed by Sheremet A. D., is carried out using the following formulas:
- Absolute liquidity ratio (K1): K1 = (p. 1250 + p. 1240) / p. 1500. In the literature, the optimal value ranges from 0.2 to 0.5.
- Current ratio (K2): K2 = p. 1200 / p. 1600. Many authors recommend that the value of this indicator be equal to or greater than 2 as the optimal value. The allowable value ranges from 1.5 to 2.5.
- Financial leverage ratio (K3): K3 = (p. 1400 + p. 1500) / p. 1300.
- Financial stability ratio (K4): K4 = (line 1300 + p. 1400) / line 1600.
- Return on Assets (ROA): ROA = p. 2400 statement of financial performance / p. 1600. The optimal growth is this ratio.
- Return on Equity: ROE = Net Profit / Average Equity.
The main factors of solvency
The solvency of any enterprise is influenced by a huge number of various negative factors that can collectively unite and reach a certain negative limit. In which case a real failure is possible, which will inevitably lead to bankruptcy of the company. Solvency analysis is a study of a whole set of interrelated factors, both external and internal.
In any case, both external and internal factors can affect the liquidity of the enterprise.
External factors affect the organization from the outside. They are not subordinate to the company in any way. But an enterprise can mitigate the influence of external factors. For example, a company may conduct market research and marketing in a company to predict possible market situations. The main external factors are those that are directly related to the state of our economy and the world as well.This also includes the political situation in the country, the economic situation, social tension in society, the state of the market.
The combination of markets, the development of the technological and information environment, the state of politics, the competitive environment, and the innovative environment all provide many opportunities for business organizations, but on the other hand they require more attention at all levels of financial management.
Internal factors are associated with the specific actions of the organization and are under its influence. Among these factors, various production, investment and financial indicators of the company are singled out separately.
Key odds
Consider the group of coefficients for assessing the liquidity and solvency of the enterprise, presented below:
- The solvency recovery ratio: Kvp = (K1tl + 6 / T * (K1tl - K0tl)) / Knorm. Where Ktl current liquidity ratio in the initial (0) and current (1) periods; T reporting period; Knorm = 2.
The standard value of the indicator of assessing the solvency of an enterprise is Kvp> 1, which reflects the company's ability to restore solvency. In addition, this coefficient is based on a trend analysis for two periods.
- The solvency loss ratio: Coop = (K1tl + 3 / T * (K1tl - K0tl)) / Knorm. The standard value is Coop> 1.
Financial sustainability as a measure of solvency
The financial stability of the company is a guarantee of survival and the basis for the stability of the company's position in the market.
Rational financial management of the enterprise helps to see changes in various indicators and, if necessary, take appropriate measures.
In the market conditions, the economic activity of the enterprise is carried out by self-financing with the lack of own financial resources due to borrowed sources of financing.
The subject of the economy, which is financially stable, is a company that is able to independently cover the funds invested in the assets of the enterprise, does not allow marginal receivables and payables and timely pays for existing obligations. The basis of financial activity is the good organization and use of the company's working capital.
Assessment of solvency and financial stability of the enterprise is the most important task of enterprise management. The financial position of the company is stable if, under adverse changes in external factors, it retains its ability to function normally and fully repays its obligations under an agreement with counterparties.
The state of the financial environment of the company can be characterized by the possibility of independence from investors in terms of money, the ability of the enterprise to rationally manage financial resources, the availability of the required number of own sources to cover the costs of the company. The financial stability of the enterprise characterizes the predominance of revenues over the expenses of the organization, guarantees the free maneuvering of the company in the market through cash and through the system of efficient use of these funds, which contributes to the continuous process of production and sales of products. Financial stability is an important element of the overall stability of the enterprise, the coherence of financial flows, the availability of cash resources.
The main objectives of the analysis of financial stability of the enterprise are as follows:
- a real assessment of the state of finance of the company;
- identification of possible reserves of the company;
- the company's offer of a number of measures to strengthen the financial situation and solve financial problems;
- forecasting the financial results of the enterprise.
Performance management
Liquidity (solvency) management consists of successive stages.
The first stage is the analysis of the initial position of the enterprise:
- cost coverage analysis;
- research of indicators of liquidity and solvency of the company.
The second stage is the forecast, which consists of determining gross profit and its shortage. Includes:
- finding profit for the previous period;
- forecasting the effect of prices on materials, the effects of shifts in the assortment, the effects of prices on products. The forecast balance informs what will happen if no action is taken;
- profit forecasts;
- the liquidity ratio of equity is calculated;
- shortage of profit is determined.
The third stage - measures to strengthen liquidity:
- fixed costs - the improvement of management functions at the enterprise is considered, the management structure is reviewed, in the worst case, if the sales of products cannot be increased, then the issue of reducing the employment of the enterprise due to changes in production capacities is considered;
- consideration of the issue of covering costs for products - include increasing prices (improving quality, advertising, searching for promising markets), reducing variable costs for products (new technologies, new labor organization, optimization of production and supply);
- sales volume of products - price reduction, optimization of the production program and sales;
- capital use - optimization of fixed capital use, working capital management.
The fourth stage is a predictive analysis that shows how much the financial condition of the company will improve when making management decisions at the 3rd stage.
Directions for improving indicators
This task is faced by all companies without exception, but, unfortunately, it is not always possible to carry it out, that is, to minimize receivables. A long production cycle, concluded with the terms of deferred payments, contributes to the formation of debt, which is non-critical and often allows it to develop, and not impede the development of the company. With regard to such debt, a company can increase internal control and prevent its unreasonable growth.
Assessment of liquidity, financial stability and solvency of the enterprise aims to identify negative trends in order to develop measures to improve the identified deficiencies.
Improving the efficiency of activities (which, in the case of competent financial management, contributes to the growth of solvency), an enterprise can achieve:
- by reducing costs;
- by expanding the market for products (services) by reducing prices;
- by improving the quality of products, which will increase production and sales and, over time, will increase prices;
- by expanding the range of products and the range of services provided;
- through the development of the most profitable types of business.
findings
Currently, firms do not pay enough attention to assessing the company's liquidity and solvency indicators, as well as to properly planning their income and expenses, as a result of which they become insolvent and find themselves in a crisis situation. The solvency control of the organization is designed to carry out management accounting at the enterprise.
In modern conditions, the analysis of liquidity and efficiency of enterprises is aimed at ensuring the sustainable development of profitable, competitive production.