The activity of any enterprise is a rather multifaceted process and consists not only of production, but also of sales, and of the organization of financing, and of other components. In this regard, the analysis of the enterprise should also be multifaceted. Moreover, this also applies to the analysis of the financial situation. It will be very problematic to describe all aspects of this type of analysis, therefore, we will dwell in more detail on the study of the liquidity of an enterprise using a method such as assessing the balance sheet liquidity.
The liquidity category is generally general economic and characterizes the ability of a property in a minimum amount of time and, if possible without loss, to acquire a monetary form. Often this concept is applied to bonds, stocks and other things, however, it is the assessment of the securities portfolio that is mainly carried out in terms of risk and profitability.
In relation to an enterprise, the concept of liquidity characterizes its ability to carry out settlements on its debts in full and without violating deadlines. In order to conclude whether the company meets this criterion, an assessment of the balance sheet liquidity is carried out. The simplest and most frequently used technique is to draw up a liquidity balance. The essence of this method is an additional grouping of assets and liabilities by liquidity and urgency, respectively. Then, a certain group of liabilities is compared with assets, the period of transformation of which into cash is similar to the maturity of obligations. Most analysts use the creation of four groups on each side of the balance sheet, although no one bothers you to use a larger number of less aggregated groups.
First, consider how asset groups are formed. The first consists of completely liquid assets. In other words, money is included here, as well as property that conditionally can also be considered money - short-term financial investments. The second group consists of assets that can be quickly converted into cash. These include accounts payable, the repayment of which is expected within a year, as well as other current assets. The property of the third group turns into a monetary form either much slower or with a greater loss of value. These are stocks and long-term financial investments. Everything that was not included in the first three groups forms the fourth. This property is most difficult to acquire in cash, and therefore, the least liquid.
The liquidity assessment of the balance sheet will be incomplete if we do not compare liabilities with assets, therefore, we proceed to consider the groups on the second side of the balance sheet. The liabilities of the first group include the most urgent debts, that is, accounts payable and other liabilities with a term of less than a year. All other short-term debts are summed up and are the second group. Long-term liabilities are fully attributed to the third group, and the result of the third section of the balance sheet can be written without a twinge of conscience as the sum of the fourth group, which is also called permanent liabilities.
After creating the groups, you need to compare them with each other by subtracting the corresponding liabilities from the assets. If this difference is positive, then there is a payment surplus, and otherwise - a disadvantage. The condition for absolute liquidity is the presence of excess in the first three groups, but a deficiency in the fourth. This same drawback is very important, as it characterizes the availability of the company own working capital.
If the described condition is not met, then it is necessary to take measures to normalize the financial condition in terms of liquidity and solvency. A more complete assessment of the current situation is possible if not only an assessment of the liquidity of the balance sheet is carried out, but also an analysis and assessment of profitability, as well as financial stability.