The solvency of an enterprise or company is usually called the ability to pay off its debts on time: repay loans, pay salaries to employees, pay for the delivery of goods (Methodological recommendations for conducting an analysis of the financial and economic activities of an organization, approved by the State Statistics Committee of Russia on November 28, 2002). Solvency is one of the main criteria for the financial stability of any enterprise. This indicator of a successful business consists of two factors:
Availability of various financial assets : funds indonesia mobile phone numbers database owned, property, accounts receivable, ownership of shares in other companies, equipment.
Degree of asset liquidity. Asset liquidity is the ability to sell assets as a means of debt repayment. It is not only the size of assets that is important, but also how quickly the company can sell them at market value - this is the ability to sell or use assets to repay debts. For example, to sell equipment or other property in order to repay debts.
Solvency is divided into two types: short-term and long-term. The first is usually understood as whether the company is able to repay its urgent debt obligations with finances or small investments - the most liquid assets of the business. Long-term, in turn, means repaying debts in the future.
The essence of enterprise solvency
Quite often the concepts of "liquidity" and "solvency" are confused with each other. There are two approaches to the definitions of these terms: adherents of the first believe that both solvency and liquidity are simultaneously called the ability of an enterprise to pay off debts.
Those who support the second option believe that these concepts should be strictly distinguished: solvency is the company's potential to pay off debts. Liquidity is the ability to quickly and effectively sell assets to pay off debts. Analysis of the solvency of an enterprise is one of the main steps in the proper organization of its work.
To make things clearer, let's look at an example.
The amount of assets on the company's balance sheet is greater than the amount of liabilities. This means that the company can be called solvent overall. At the same time, the company's assets are on its fixed assets account, and the company has virtually no finances. Since fixed assets are difficult to sell quickly on the market, such assets are called "hard to sell". If equipment in such a company breaks down, there will be no money to restore it, which indicates low liquidity.
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Why count these indicators?
What are the main goals and objectives of financial analysis of solvency and liquidity of an enterprise? First of all, the analysis of the solvency of an organization is carried out to understand whether it is close to bankruptcy. It is worth noting that the liquidity of a company and its potential are not related to each other. The liquidity assessment can only reflect the current state of affairs. When a company works according to a long-term plan, this indicator is no longer so important. This means that the possibility of further growth of the company should be assessed from the point of view of solvency. Some financiers conduct solvency analysis based on the balance sheet.
The most important way to determine the liquidity and solvency of a company, as well as the financial stability of the company, is to conduct a ratio analysis. Actual ratios are compared with the recommended ones. After that, an opinion is formed on whether the organization is solvent, whether it is financially stable, whether it is profitable, and also how high its business activity is. But often in practice, conducting the analysis in question is not enough. For a more extensive understanding of the financial condition of the company, it is necessary to evaluate the indicators of accounting statements in the process of development.
It should not be forgotten that, having conducted a comprehensive economic analysis of the company's work, based on its liquidity and solvency, it is possible to understand how much it needs cash investments in the current financial situation. At the same time, any organization itself assumes obligations for liquidity and solvency both for the short term and for the future.
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For whom are the indicators of solvency and liquidity of the enterprise important?
The analysis of solvency has various tasks and goals. The following are mainly interested in the indicators of the results of the analysis of solvency and liquidity of enterprises:
Banking organizations and microfinance organizations – to assess the possibility of issuing loans and the degree of risk involved.
Financial directors – to make decisions regarding further interactions when compared with other candidates.
CEOs, owners of companies or internal service employees for the purpose of control, planning and forecasting.
For whom are solvency indicators important?
Tax service employees - to give the taxpayer some deferment or installment plan in the process of paying taxes. Most often, tax officials are guided by the Methodology for Conducting an Analysis of the Financial Condition of an Enterprise (approved by order of the Ministry of Economic Development of Russia dated April 18, 2011, No. 175).
Arbitration managers. In this case, the main purpose of the analysis is to assess the effectiveness of measures taken to bring the company out of the crisis (in accordance with the Federal Law of October 26, 2002 No. 127-FZ "On Insolvency (Bankruptcy)").
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What is needed to calculate liquidity and solvency
To assess the liquidity and solvency of an enterprise, you need to thoroughly study its balance sheet - the ratio of assets and financial liabilities of the company. You can contact an accountant for figures.
Often, all that a business has are its various assets: non-cash and cash, real estate, equipment, and accumulated accounts receivable. Liabilities are debt obligations that must be repaid. In order to correctly analyze the solvency and financial stability of an enterprise, these indicators must be combined.
What is needed to calculate liquidity
To objectively analyze the solvency of an enterprise, it is necessary to adhere to a number of rules:
When calculating, take into account the value of the property declared by the market, and not the book value. For example, for a car, the actual value will be the one calculated when it is sold.
Change overdue accounts receivable. For example, the buyer did not pay for the goods on time and it is unclear whether he will pay at all. In this case, the debt is simply not taken into account, as if there was no receipt of money. The same with the remaining goods that could not be sold.
The table below and further in the text provide simplified examples of calculations - the main principle when conducting a financial analysis of the solvency of an enterprise. Since each company has its own individual work scheme, you can only understand all the intricacies in detail with a specialist.
Assets: They are most often grouped by liquidity period Liabilities: grouped by repayment period
A1 – highly liquid assets. This is the name given to, for example, money in accounts or in the cash register, as well as various shares and bonds. P1 – urgent liabilities: these include those that must be repaid on the day of the company's balance sheet assessment. This includes debts on wages, to contractors, off-budget funds, the budget, and so on. In short, everything that is not repaid on time.
A2 – this category includes those assets from the sale of which you can quickly make a profit. An example is accounts receivable with an early maturity date. P2 – liabilities with an average maturity that must be repaid within 12 months. These include short-term loans.
A3 – slow-moving assets that cannot be sold at market price before a specific date. Examples here are finished goods, raw materials, or accounts receivable with more than 12 months of payment. P3 – long-term liabilities with a maturity of more than one year. Example – long-term loans.
A4 – all assets with difficult realization. This includes equipment and real estate. P4 – permanent liabilities. This term refers to those funds that do not need to be shared with anyone. This includes profit from shares, additional capital of the enterprise, as well as profit that has not been distributed. If P4 is close to zero or even in the red, the company operates only at the expense of borrowed funds, without having its own.
Grouping assets and liabilities is a stage of preparing the enterprise solvency analysis. At the same time, indicators A1–A4 and P1–P4 are necessary for analyzing the financial condition of the company.
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Analysis of solvency and liquidity of the enterprise by the ratio of assets
An example of an enterprise solvency analysis looks like this:
Absolute liquidity Normal liquidity Liquidity is compromised Crisis state
Absolute liquidity. This outcome is considered optimal: a company or individual pays off all debts on time. In this case, the bank issues a loan without difficulty, and the company pays off on it.
Normal liquidity. With this, the organization's solvency is somewhat reduced due to a large tax burden at some point or a delay in payment for goods by the client. In general, this situation is quite acceptable, and if everything else is in order, the bank should issue a loan without difficulty.
With impaired liquidity, the company is most likely accumulating debts and cannot pay them back on time. The reasons for this can be quite significant: a decline in production, serious payment delays from clients, a crisis, unfinished lawsuits. It will be difficult to get a loan in such a situation, and if it does work out, it will not only not solve the problem, but will even aggravate it.
Crisis period. This means that the company cannot get out of the debt hole. Restoring solvency is extremely difficult, and loans should not be issued. Banks are reluctant to approve the issuance of borrowed funds in this case.
