In the process of analyzing the financial and economic performance indicators of the enterprise, financiers can pay much attention to the slowly sold assets of the company. With what it can be connected? You will find the answer to this question in the article.
Why are slow-moving assets determined?
What are these assets of the enterprise?
Assets - slowly sold or any other - are determined in most cases as part of the analysis of the economic activity of the enterprise. The main source of financial data in the case of solving the corresponding problems is the balance sheet of the enterprise. It is formed on the basis of real business indicators of the company, approved by its management and is considered as a key element of the financial statements.
Any current assets, which are slowly being sold including, are analyzed, in particular, in order to adequately assess by interested parties - primarily the owners of the enterprise, the creditworthiness of the business. The structure of a firm’s assets affects its ability to fulfill obligations arising in a timely manner, including repayments on loans.
Consider the importance of assets that are slowly sold in assessing the effectiveness of the business model of the enterprise. The following classification of the corresponding type of organization resources will help us to study their specifics.
Classification of enterprise assets
Among modern financiers, there is a common approach by which assets are classified into the following main categories:
- the most liquid (the so-called assets of group A1);
- quickly implemented (A2);
- slow-moving assets (A3);
- difficult to sell assets.
Consider their specifics, as well as the differences between them in more detail.
What are the assets of group A1?
It is customary to classify the relevant assets as cash at the disposal of the enterprise, as well as short-term investments. Both types of assets under consideration are reflected in separate lines of the balance sheet.
The attribution of these assets to the most sold is quite understandable: the funds of the enterprise can be spent at any time in order to purchase something or pay dividends to business owners. They are characterized by absolute liquidity. In turn, short-term investments are assets that the company can sell to other business entities, and in some cases to individuals, at almost any moment. Therefore, they can also be rightly attributed to the most sold resources.
Features of assets of group A2
The next group of assets are those that are classified as being marketable. These traditionally include the accounts receivable of the organization, which must be repaid within 12 months from the moment of formation of the balance sheet or other source that is used in the analysis of assets.
These resources are sufficiently highly liquid, however, how quickly they can be realized depends, first of all, on the terms of the contracts for which receivables arise, the terms of the exchange of financial transactions between the parties to the transaction, and the solvency of the obligated party.
Assets of group A3
The next category of resources is exactly the same assets that are slowly being sold, or those that belong to group A3. These traditionally include inventories, as well as VAT, which is refundable from the state.
The actual liquidity of the assets in question depends primarily on the dynamics of consumer demand for products manufactured by the enterprise. At the same time, its structure may contain both very slowly sold assets, and those that are represented by goods characterized by extremely high demand, therefore objectively subject to a higher level of liquidity - even if not A1, but, quite possibly, A2.
Thus, it makes sense to classify the type of assets under consideration for additional reasons, and this will only increase the overall effectiveness of the analysis of the economic performance of the enterprise.
Assets of group A3 as negotiable: what are their specifics?
It can be noted that the 3 categories of assets considered by us are traditionally classified as negotiable. They are characterized by a common feature - the ability to change their structure within the framework of various production cycles.
How quickly circulating assets will be realized is largely determined by the effectiveness of the marketing strategy of the enterprise. It happens that assets that are slowly being sold within one reporting period change their demand in the market quite sharply. Such patterns can be cyclical in nature - for example, if we are talking about seasonal goods or those that, in terms of determining the selling price, are highly dependent on fluctuations in the national currency.
A4 assets
Another group of assets that can be analyzed in the framework of assessing the effectiveness of the model of economic development of an enterprise is difficult to realize. These most often include non-current assets, as well as accounts receivable, which must be paid by the obligated party more than 12 months after the analysis of the economic performance of the enterprise. Non-current assets include fixed assets and other resources that are acquired by the company to organize the production process.
Actually, the need to sell the assets in question arises, as a rule, during the liquidation or reorganization of an enterprise during a merger or acquisition.
So, we have studied what type A3 resources are - slow-moving assets, other values, classified using criteria common among modern financiers. It will also be useful to consider how the relevant assets can be used in the framework of the analysis of the economic activities of an enterprise in practice.
Assets in the analysis of economic indicators: nuances
The consideration of assets in the context of the analysis of indicators of economic activity of the organization can be carried out only if they are compared with indicators characterizing the value of certain liabilities of the company. They can also be classified according to different criteria. So, there are liabilities:
- the most urgent (liabilities P1);
- short-term (P2);
- long-term (P3);
- constants (P4).
The first includes those obligations that it is desirable to pay off within 3 months. The second - liabilities that need to be compensated for a period of 3 months to 1 year. Long-term liabilities involve repayment over a period that exceeds 1 year. Permanent liabilities include, in particular, the authorized capital of an enterprise, retained earnings, and future income.
How are slow-moving and other assets analyzed when compared with the size of liabilities? We will study this issue in more detail.
Assets and liabilities in balance sheet analysis: nuances
An approach among financiers is widespread, according to which the balance sheet of an organization is considered as completely liquid if:
- assets of type A1 are greater than or equal to liabilities of type A1;
- resources of type A2, in turn, correspond in magnitude or exceed obligations P2;
- there is no excess of slow-moving assets with long-term liabilities;
- hard-to-sell assets are less than or equal to permanent liabilities.
If the above ratios are observed, the investor or any other interested person, such as a creditor, can highly evaluate the effectiveness of the enterprise.
It can be noted that if at least the first 3 ratios are met, the 4th one will also be fulfilled, and this will mean that the company has sufficient working capital to obtain very high financial stability. In turn, if the first 3 ratios are not observed during the financial analysis of assets and liabilities, this may indicate that the firm’s management model is not very efficient, and its balance sheet is characterized by low liquidity.
At the same time, the fact that, for example, slowly sold assets are in full compliance with the balance, may not necessarily mean that the company has enough other resources. As a rule, during the production process one type of asset does not replace another, unless, of course, we are talking about cost compensation for resources.
The ratio of assets to liabilities: nuances
There are other formulas for assessing the effectiveness of the production model of the enterprise.
So, it can be characterized as highly effective if the sum of liabilities P1 and P2 is less than A1 assets. In turn, the solvency of the enterprise can be estimated as corresponding to a high level if the sum of liabilities P1 and P2 is less than the sum of assets A1 and A2.
However, if the opposite is the case, that is, the amount formed by adding indicators A1 and A2 is greater than that obtained by adding A1 and A2, but less than the sum of indicators A1, A2 and A3, solvency can be characterized as acceptable in normal market conditions. In the event of a crisis, the company may already have some problems with servicing obligations.
In turn, if the sum of indicators A1, A2 and A3 is less than that which is formed as a result of addition of liabilities P1 and P2, then the business development model can be estimated as ineffective based on the fact that the company is likely to experience difficulties in servicing debts due to assets.
Summary
So, we examined what are the principles of classification of assets of an enterprise, as well as what is the meaning of their analysis. Assets that are slowly sold include mainly the company's inventories, deductible VAT, and other resources, characterized by similar turnover ratios. At the same time, it makes sense to carry out an additional classification of the corresponding type of assets for the reason that their liquidity can vary significantly, based on the characteristics of demand for a particular product. And it can depend, for example, on a seasonal factor.
When analyzing the effectiveness of the production model of an enterprise, resources of the A1, A2 type and other current assets, which are slowly being sold among them, it makes sense to consider in the context of comparison with the value of the company's liabilities. In general, the excess of the former over the latter will be welcomed. However, if this is so, then it is assumed that the assets that are difficult to realize relating to type A4 will be less than permanent liabilities - those that are classified as liabilities P4.