The most liquid assets of the enterprise

The financial condition of each company is assessed by solvency and liquidity indicators. They tell professional economists whether in the short term the enterprise will be able to pay off all its obligations and debts.

The liquidity of assets is the ability of an organization to quickly repay debts using borrowed funds and its own. This indicator acts as a kind of guarantee of financial stability. It is expressed in the degree of security or, on the contrary, insecurity of assets by long-term sources. The most striking sign of the liquidity of an enterprise is the excess of the value of assets over liabilities in the short term. The greater this difference, the more stable the financial position of the company.

The most liquid assets are characterized by a high rate of conversion into cash. In economics, they are referred to as A1. These include short-term investments, organization cash and money in accounts.

The next group is A2. It includes receivables.

A3 - are slowly being implemented. In the balance sheet they are reflected as “Long-term investments”, as well as “Current assets”.

A4 - are implemented quite difficult. These include Non-current Assets.

Liabilities are also divided into four types, depending on the urgency of the return.

P1 - the most short-term obligations. These include accounts payable and short-term liabilities.

Group P2 includes “Borrowed funds” and part of the article “Short-term liabilities”.

A longer return period at P3. These liabilities include long-term loans, as well as other borrowed funds.

There is an article “Capital and reserves” in the balance sheet. She is assigned to the group “Permanent liabilities” - P4.

Analysis of liquidity and solvency includes a comparison of assets and liabilities. If the company has a stable financial position, then it is more consistent with the following conditions: A4≤P4; A3≥P3; A2≥P2; A1≥P1. In the case when the most liquid assets significantly exceed liabilities P1, the company can repay short-term obligations in a short time. When at the same time the conditions A3≥P3 are observed; A2≥P2, the organization has good financial stability. Inequality A4≤P4 suggests that the company has large own working capital. If all these conditions have the opposite value, then the liquidity of the balance sheet is very different from absolute.

It is possible that some types of assets in excess will compensate for the lack of others, but it must be borne in mind that the time to turn them into money may take a longer period. For example, the most liquid assets cannot be replaced by others, since they are the fastest way to pay off obligations with counterparties.

During the analysis of the state of the company, a number of indicators are calculated. The main ones are:

1) Current ratio. It is calculated as the quotient of current assets and current liabilities.

2) Absolute liquidity ratio. This is the ratio of cash to current liabilities.

3) Quick liquidity ratio. These are the most liquid assets divided by current liabilities.

The degree of financial stability, that is, solvency and liquidity of the company, it is useful to know almost all counterparties. For example, a bank will not issue a loan to an organization until it has fully studied the balance sheet and some other accounting documents. If a financial employee is convinced that this organization is subsequently able not only to fully repay the loan taken, but also to pay all the interest on it, then it will receive the necessary amount of money.

In addition, the economist or manager of the enterprise should monitor the changes in solvency and liquidity, and report the results to management.