The interim liquidity ratio of an enterprise is the main characteristic that determines the current financial condition. At the same time, it is necessary to distinguish between the current solvency of the enterprise, whether it can pay off its debts, with liquidity, that is, with the availability of money and other resources in order to pay debts at the moment, but in practice, in the overwhelming majority of cases, they are perceived as synonyms.
Solvency
An important indicator by which the ratio of intermediate liquidity is determined is the working capital of the company, which makes up the difference between current liabilities and current assets. Any organization has working capital until the time when current assets have a larger amount compared to short-term liabilities. This indicator is also called net current assets.
In the overwhelming majority of cases, the main reason why the amount of working capital is changing is the profit or loss of the organization received over a certain period of time.
How does it change?
The interim liquidity ratio of an enterprise, the formula of which includes working capital, is directly dependent on changes in it. The increase in equity, which increases by outstripping the increase in the number of current assets in comparison with the current short-term liabilities, is often accompanied by an outflow of money. The decrease in working capital, which is observed if the growth of current assets lags behind the increase in short-term liabilities, is mainly determined by the receipt of all kinds of loans or loans.
A company should be able to easily transform its working capital into real money, and this is one of the basic concepts that determines the ratio of intermediate liquidity. If in current assets there is a sufficiently large amount of difficult to realize capital, then the solvency of the enterprise is reduced.
Bankruptcy
Decisions that are made depending on the system of criteria used to declare companies insolvent are the basis for preparing a proposal for financial support for such organizations, as well as their reorganization or even complete liquidation.
In addition, if the intermediate liquidity ratio of the company is small, and it does not have the ability to provide for its short-term obligations, then creditors can independently file an application with the arbitration in order to declare the company insolvent, that is, to declare bankruptcy.
Accordingly, bankruptcy as a certain state of lack of solvency of a company is established exclusively in a judicial proceeding.
What is bankruptcy?
There are two types:
- Simple. Used in relation to the debtor who is guilty of frivolity, poor conduct of their affairs or inconsistency. Poor conduct of business means participation in gambling, conducting any speculative operations, too big household needs, deficiencies in accounting and much more.
- Malicious. This type of bankruptcy is caused by the fact that the company takes any illegal actions in order to mislead its own creditors.In particular, this concerns the concealment of documents, as well as some of the company's liabilities, the deliberate overstatement of the sources of the appearance of the company's property.
In addition to the above signs, which can determine this company as insolvent, there are also a number of additional criteria indicating the likelihood of potential bankruptcy, as well as predicting a situation when the ratio of intermediate liquidity decreases. A formula may also take these criteria into account.
What are these criteria?
The bankruptcy criteria of a company are as follows:
- An incorrect system of current assets, as well as observing a trend towards a possible increase in the number of difficult to sell assets.
- The decrease in the turnover rate of funds due to the fact that excessive stockpiles are accumulating, as well as overdue debts of customers and buyers.
- Too many expensive loans or loans available in the company's obligations.
- The presence of overdue loans or loans, as well as an increase in its share in the total number of liabilities of the company.
- The trend is a significant increase in term liabilities in relation to an increase in the most liquid assets.
- The ratio of intermediate liquidity is reduced. The balance sheet formula clearly indicates this symptom, as a result of which the company must take some measures, otherwise it may be declared bankrupt in the near future.
- The emergence of non-current assets through the use of short-term sources of finance.
Carrying out the analysis, it will be necessary to timely identify and eliminate the above negative trends, if they are observed in the company.
What to consider?
You should remember that the current solvency of the company is revealed in accordance with the balance sheet data only once a quarter or a month. But at the same time, the company settlements with creditors should be carried out daily.
It is for this reason that in order to conduct an operational analysis of the solvency of the company, relevant at the moment, to achieve daily control over the receipt of money from the sale of various services or goods, from the repayment of other receivables, as well as other receipts of funds and ensuring control over the implementation of their own payment obligations to creditors and suppliers, a specialized payment calendar should be drawn up. It will contain the funds that the company has at the moment, expected revenues, that is, receivables, as well as a reflection of payment obligations for a given period.
The preparation of the operational payment calendar is carried out on the basis of data on the sale or shipment of products, on acquired cash assets, documentation on payroll or advance payments for employees, based on bank statements and other necessary information.
If it is necessary to assess the prospects of the solvency of the company, the quick liquidity ratio, the intermediate coverage ratio and others are determined.
Liquidity
An enterprise can be called liquid if it has the resources to fully repay short-term debt on loans by selling current assets.
A company may be liquid to a certain extent, because current assets include their various types, where there are difficult to sell, as well as easy to sell assets. In this regard, there are several groups of liquidity of current assets of the company.
Absolute
Urgency ratio, or critical liquidity ratio (interim coverage) is the ratio of cash, as well as any quick-selling short-term securities to existing short-term payables.This indicator allows you to understand which specific part of this debt can be repaid at the time of the balance sheet. The acceptable values of this coefficient are 0.2-0.3.
Intermediate
In this case, the interim liquidity ratio is considered. The formula for the balance of this ratio includes the ratio of cash and short-term quickly traded securities present at the company to the receivables present, as well as various short-term debt on loans. The formula itself is as follows:
TO Crete. liquor. = DZ + DS + KFV / KO = (p. 240 + p. 250 + p. 260) / (p. 610 + p. 620 + p. 630 + p. 650 + p. 660)> 0.7 - 1
This characteristic allows you to see the number of short-term obligations of the company. It can be extinguished not only due to those cash and securities that are present on the balance sheet of the company at the moment, but also due to possible receipts for any shipped products, services provided or work performed.
The most optimal value for this coefficient is 1: 1. It is worth noting the fact that the validity of the conclusions regarding the ratio very much depends on how “quality” the receivables are, that is, on the timing of their appearance, as well as on the financial condition of the debtors themselves. A sufficiently large amount of doubtful accounts receivable can greatly worsen the overall financial condition of the enterprise.
Current
The coverage ratio allows you to determine the overall security of the company with working capital. In this case, the ratio of the actual price of the assets present to liabilities, that is, to short-term liabilities, is established. In the same way as the intermediate liquidity ratio is considered, the normative value of this indicator is determined by subtracting the amount of expenses for the coming periods, as well as the amount of value added tax on the received values from the total number of current assets. In addition, short-term liabilities should be reduced by the amount of income for the coming periods, various consumption funds and reserves for future payments and expenses.
In this case, the current ratio or intermediate liquidity ratio shows how much the current assets present are able to cover the company's short-term liabilities, as a result of which this value should be at least two.
The current ratio provides an opportunity to determine how short-term liabilities are covered by current assets present in the company. That is, how many times a company can fully satisfy the requirements of its creditors in the event that it will completely cash out all the assets it currently has.
Security
There is also another indicator that determines how much the company is provided with its working capital. Calculate it in one of two ways:
- Non-current assets are deducted from sources of own funds, after which the resulting number is divided into current assets.
- Short-term liabilities are deducted from current assets, after which the resulting number is divided into current assets.
This ratio should be at least 0.1.
How to work with existing values?
Assume that the ratio of intermediate liquidity is considered, the norm of which is 1: 1. In the case when the current value is less than two, and the degree of provision of the company with working capital is less than 0.1, then automatically the balance sheet structure of the company or organization is recognized as completely unsatisfactory, while the company itself is insolvent.If one of the above conditions is met, and the other is not, then it is assessed whether it is possible to restore the solvency of the company.
In order to make a decision about the real possibility of a future restoration of the solvency of a company, it is necessary to make the intermediate critical liquidity ratio (or current liquidity) more than two.
Balance sheet liquidity
The solvency of a company is directly affected by the liquidity of its current assets.
A qualified assessment was given the following name: liquidity analysis. By carrying out this procedure, assets grouped by liquidity are compared with the company's current liability for liabilities grouped by maturity. In this case, determining the liquidity ratio (intermediate coverage ratio) can establish how Current responsibility companies are provided with financial resources.
Such a characteristic as balance sheet liquidity represents the degree of coverage of a company's obligations with its assets, the speed of transformation into money of which should correspond to the maturity of the obligations present.
All sorts of changes in the present liquidity level can also be analyzed by the dynamics of the company's working capital. For the reason that this value is the remainder after full repayment of various current liabilities an increase in its level corresponds to how much the ratio of intermediate liquidity increases. Conclusions regarding the current state of the company and further actions are already being made on the basis of the calculations.
