Abstract

Content

• Introduction
• 1. The economic essence of solvency and liquidity of the enterprise
• 2. Methods of analysis of solvency of the enterprise
• 3. Problems of solvency of the enterprise and ways to solve them
• Conclusion
• References

Introduction

Modern market relations require a detailed study of the financial condition of the enterprise. Diagnostics of financial activities is necessary not only for internal users, for monitoring and making correct management decisions, but also for external users, such as investors, suppliers, credit and financial organizations, to determine the solvency and profitability of a business entity.

Solvency problems of enterprises in the modern world are one of the most important not only financial, but also general economic problems. Insufficient solvency can lead to a shortage of funds from enterprises for the development of production, their insolvency and even bankruptcy, while excessive solvency will impede development, burdening the costs of the enterprise with excessive reserves and reserves.

This situation can be avoided only through analysis of the financial condition of the enterprise, which is a set of indicators reflecting the availability, placement and use of financial resources.

1. The economic essence of solvency and liquidity of the enterprise

In modern conditions, the key to survival and the basis of a stable position of the enterprise is its financial stability, which includes solvency and liquidity indicators. It reflects the state of the financial resources of the enterprise, in which it is possible to freely maneuver money, use them effectively, ensuring an uninterrupted process of production and sales of products, take into account the costs of its expansion and updating.

Financial stability depends both on the stability of the economic environment in which the enterprise operates, and on the results of its functioning, its active and effective response to changes in internal and external factors.

In contrast to the concepts of “solvency” and “liquidity”, the concept of “financial stability” is broader and more vague, because includes an assessment of different aspects of the business entity.

Financial stability is the ability of an enterprise not only to maintain a sufficient level of business activity and business efficiency, but also to increase it, while ensuring solvency and investment attractiveness within acceptable risk limits [1].

The financial stability of any business entity is characterized by liquidity and solvency. These concepts are not identical, but in practice are closely interrelated. It is advisable to clarify the essence of the concepts of liquidity and solvency.

Solvency is the willingness of an enterprise to repay the claims of creditors, which have reached the deadlines for payment due to absolutely liquid assets (cash).

There is a certain relationship and interdependence between indicators of liquidity and solvency - liquidity determines the solvency of the enterprise.

In fig. 1.1 shows a block diagram reflecting the relationship between solvency, liquidity of the enterprise and liquidity balance.

Liquidity, on the one hand, is the reciprocal of the time it takes to quickly sell an asset at a given price. On the other hand, this is the amount that can be earned for it. These parties, of course, are interconnected: if you want to get a large amount for your product (service), you need to bargain longer or find a good buyer, so you will receive a cash prize. But sometimes money is needed urgently in order to quickly solve a problem or invest in a more profitable business, then it is more profitable to yield in price and get a gain in time.

The concepts of “solvency” and “liquidity” characterize the probable ability of a subject of economic relations to fully repay (fulfill) obligations - this is their similarity. Both definitions are used in assessing the relations of entities to fulfill their obligations and not only debt. In part, this explains the lack of the need to separate these concepts in financial research [2].

Solvency assumes that the company will direct only financial assets (cash and cash equivalents, financial investments, receivables) to pay off liabilities.

Liquidity implies the use of both financial and tangible current assets (raw materials, finished products, etc.) as payment instruments. At the same time, it is assumed that tangible assets will be converted into cash to pay off liabilities.

The difference in payment assets has a decisive influence on the calculation methodology and the names of the estimated indicators [2, p.128].

2. Methods of analysis of solvency of the enterprise

The practice of financial analysis has already developed the main types of analysis of the solvency of the enterprise. Among them, seven main methods can be distinguished [3]:

1. Horizontal (temporary) analysis is a comparison of solvency and liquidity ratios of the period under review with the previous one.

The objectives of the horizontal analysis are to identify changes in various indicators of financial statements for a certain period, to determine the nature of these changes. Changes are considered absolute and relative. In horizontal analysis, there is often the practice of constructing analytical tables in which data on absolute indicators are supplemented by the relative rate of change: increase or decrease. If we conduct horizontal analysis in conjunction with the trend, then, in addition to analyzing individual financial indicators, we can also make forecasts regarding changes in these indicators.

2. Vertical (structural) analysis – determining the structure of the final financial indicators with the identification of the impact of each reporting position on the result as a whole.

This has certain advantages. Firstly, the calculation of the specific gravity allows you to compare the financial performance of the enterprise with the performance of other enterprises, which provides information on the effectiveness of activities, management and production. Often, competitive firms use a similar method. Secondly, relative indicators make it possible to ignore the negative impact of inflation, which, at absolute values, significantly distorts their values.

3. Trending is an analysis of each solvency ratio for a number of previous periods and determining a trend, ie the main trend in the dynamics of the indicator, cleared of random influences and individual characteristics of individual periods. With the help of the trend, the possible behavior of indicators in the future is assessed, which is a promising predictive analysis.

4. The analysis of relative indicators is the calculation of solvency ratios and on their basis the determination of the degree of solvency of the enterprise.

5. Comparative (spatial) analysis is an inter-farm analysis of solvency indicators of a given enterprise with competitor indicators, with industry average data.

6. Factor – analysis of the influence of individual factors (causes) on the effective indicator (solvency) using deterministic or stochastic research methods. Moreover, factor analysis can be either direct (the analysis itself), when the analysis is divided into its component parts, or inverse, when they compose a balance of deviations and summarize at the generalization stage all deviations identified, the actual indicator from the baseline, due to individual factors.

7. Integral (generalizing) analysis. Given the variety of indicators of solvency and liquidity, the difference in the level of their critical assessments and the difficulties that arise in this regard in assessing the solvency of an enterprise, many domestic economists recommend conducting an integral point assessment of the solvency of the enterprise.

A significant drawback of the application of most methods of analyzing the solvency of an enterprise is the presence of a large number of coefficients that reflect the essence of this complex economic category, which makes it difficult to obtain an unambiguous assessment, based on which you can focus and make a general conclusion about the level of solvency of the enterprise.

To eliminate this problem, along with the traditionally used set of analysis methods (horizontal, vertical, trend, comparative, etc.), it is recommended to carry out an integral analysis, which, based on a generalization of the main indicators of the solvency of the enterprise, makes it possible to make an unambiguous conclusion about its level.

3. Problems of solvency of the enterprise and ways to solve them

The main problem of solvency analysis is the use of only financial statements, as a result of which absolute and relative indicators are calculated, i.e. Statistical evaluation is carried out, not dynamic. The main drawback of the balance sheet is not displaying the relationship between the assets and liabilities of the enterprise, namely, which assets were invested in its own resources, which assets were acquired with borrowed funds, etc. [4].

To date, the main method of analysis is coefficient-based [5]. The main drawback of which is the assessment of data at the beginning and end of the reporting period, i.e. does not provide information on the functioning of the enterprise during the period. As a result, the analysis shows financial instability, although the company normally carries out its activities and makes a profit.

The company needs such solvency, which is designed for the long term. Thus, the condition for the stability of the enterprise is a certain ratio of own and borrowed funds [6]. A negative trend is a significant excess of borrowed funds over their own. However, the use of borrowed funds allows the company to increase the scope of activities, to find new markets, which, in turn, helps to increase profits.

Thus, it is necessary to solve the problem of the capital structure of the enterprise so that the company has the opportunity to purchase borrowed funds in the optimal amount in order to use them effectively.

An urgent problem is that the established standards for solvency ratios do not take into account the industry affiliation of the enterprise, which leads to problems in the future. For example, a credit institution’s refusal to lend to an enterprise because of an indicator value that is not included in the regulatory interval.

The big problem of reducing the solvency of the enterprise is the presence of a large number of intermediaries, because of which there is a shortage of significant amounts of cash resources. To eliminate this problem, direct and reliable relations should be established with suppliers of raw materials and resources, partners and regular customers.

Also, an unfavorable investment climate entails low solvency and, as a result, inefficient activity of the enterprise. Thus, the enterprise is deprived of significant additional amounts of borrowed resources that can be used to modernize equipment, improve product quality and others.

Identified problems require the timely formation and implementation of a mechanism to restore and improve solvency.

For a timely internal analysis of current solvency, daily monitoring of the receipt of funds from the sale of products, repayment of receivables and other cash receipts, as well as for monitoring the fulfillment of payment obligations to suppliers, banks and other creditors, a payment calendar is compiled, in which, on the one hand, cash and expected means of payment are calculated, and, on the other hand, payment obligations for the same period.

The payment calendar provides daily control over the receipt and expenditure of funds, allows you to synchronize positive and negative cash flows, determine the priority of payments by the degree of their impact on financial results.

Thus, the payment calendar is an important tool for the operational management of the current solvency of the enterprise.

The next step to improve the financial condition of the enterprise is to reduce and effectively manage receivables and payables. It is necessary to carry out a number of measures aimed at reducing accounts receivable and direct the proceeds to repay accounts payable. Thus, this will lead to an increase in cash, an acceleration of the turnover of working capital, an increase in the availability of own working capital, an acceleration of the turnover of receivables and, as a result, more rhythmic receipts from debtors.

An effective measure in the management of accounts receivable will be the establishment of a debt limit, upon exceeding which the shipment of products to the debtor ceases. This event requires the introduction of a regular check of debtors for solvency.

An effective way to increase solvency is possible due to changes in the structure of assets by reducing the size of stocks in the general structure of assets. To do this, you can take measures such as inventory of stocks in order to identify in them illiquid, not necessary for the enterprise, but burdening the balance; reduced demand for these stocks and their costs.

Thus, since most enterprises are in a state of crisis, their main goal is to develop a set of measures to overcome it. It is necessary to pay off all debts, which is quite difficult in the face of insolvency. The main direction of achieving solvency is the introduction of advance forms of payment, offsets and bill circulation into the system of settlements. Also, when solving the problem, it is important to support the state by providing privileges for lending. This is especially important for small enterprises that have little cash and getting a loan for them is quite problematic [7].

Conclusions

Summing up the work, we can say that solvency and liquidity are the most important indicators of the financial condition of the enterprise. Based on the analysis, we can conclude about the development trends of the enterprise, study the investment attractiveness of the project, and also timely adjust its activities at one stage or another.

Solvency is an external manifestation of financial stability and reflects the presence of the enterprise cash and cash equivalents sufficient for settlements on its obligations. In turn, liquidity is the ability to turn property and other assets of an organization into cash.

References

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