The profitability of the enterprise is largely dependent on timely diagnosis of the economic insolvency of the organization. And profitability indicators of production are the starting point of its financial recovery, reorganization or timely liquidation.
The diagnostic mechanism is based on the following sequential actions:
1) assessment of business entities and identification of organizations with an unsatisfactory balance structure ;
2) identification of the dependence of the obtained estimates on the obligations of the state to such organizations:
a) if it is established that the insolvency of the organization is not directly related to the obligations of the state, then this fact is the basis for a decision to change the management of the organization, its priority privatization or appeal to the economic court to initiate bankruptcy proceedings;
b) if it is established that the organization’s insolvency is connected with the indicated obligations, then it does not give grounds for applying the above measures of responsibility with respect to the organization’s management and the organization itself;
3) it is determined what are the indicators of profitability (trade enterprise, service provider, manufacturing enterprise).
In the composition of the above measures, an objective assessment of enterprises and indicators of profitability of the enterprise, which completely determine the ability to evaluate the activities of diagnosed enterprises, are of paramount importance.
The importance of the practical significance of assessing the financial condition imposes certain requirements on its reliability and objectivity and, as a consequence, on the procedure for its implementation.
For the assessment of organizations, the corresponding instruction adopted by the decree of the Ministry of Finance and the Ministry of Economy is used.
The basis for recognizing the enterprise as economically insolvent is the presence of a situation in which the profitability indicators of the enterprise and the values of the estimated indicators are less than their normative values. The normative values of these coefficients are differentiated by the main branches of the sphere of material production.
In the course of practical testing, it turned out that the application of the instruction gives reason to recognize the unsatisfactory financial condition of a very large number of industrial enterprises. However, a detailed study of the state of affairs at these enterprises revealed a large number of quite successfully functioning entities that make a profit and regularly pay wages to staff, taxes to the state and have quite satisfactory profitability indicators. In such a situation, there is a need to improve the evaluation criteria specified in this instruction.
For all the significance of the indicators reflected in the instructions, they were clearly not enough for an objective, reliable assessment of economic insolvency. Solvency of a modern market enterprise cannot be characterized only by the current liquidity of its assets.
Firstly, current liquidity is an intermediate characteristic of the state of finance of an enterprise. Through the implementation of effective (ineffective) transactions by an enterprise, its liquidity at some point can be restored (lost) without a particularly tangible impact on its solvency and financial reputation in general.
Secondly, the solvency of enterprises in modern, dynamically developing market conditions depends not so much on the liquidity of assets, but on the quality of daily cash flows.
The indicator of the provision of organizations with their own funds also cannot be used for an objective assessment. For example, with high business activity of enterprises, the impact on their finances of an unsatisfactory balance sheet structure will be short in time and minimal in essence.
The financial condition, as you know, is the most difficult economic category, formed under the influence of three main components: solvency, financial stability and business activity. Taking into account the generally recognized multifactorial nature of the studied phenomenon, in our opinion, it is required to form a system of estimated indicators, avoiding the very attractive practice of minimizing their numbers. The diverse composition of the estimated indicators will contribute to a reliable assessment of the financial condition of organizations and the identification of economically insolvent ones among them.