Monitoring solvency indicators of an enterprise is an important part of the work of the analytical department. At the same time, liquidity of the balance deserves special attention. There is a fairly simple technique for assessing the structure of the main financial plan of an enterprise. How the balance sheet liquidity analysis is performed will be discussed in detail below.
Definition
Analysis and assessment of the liquidity of the balance sheet of the enterprise is carried out both by internal analytical services and by third-party appraisers. This is important information that allows you to draw conclusions about the solvency of the company, its financial stability and investment attractiveness.
Liquidity is the ability of an enterprise to settle accounts with its creditors, investors, suppliers and other entities in respect of which debt obligations arise on time. The easiest way to do the analysis is by looking at the structure of the balance sheet.
This reporting form consists of an asset and a liability. The first part reflects information about the acceptance or revalued value of all property of the organization. The passive contains data on the cost of financing sources, due to which the asset items were generated. Both sides of the balance should be equal.
In the course of its activities, the company has debts. It can attract borrowed capital on different conditions. All contracts must be completed on time. Otherwise, the organization has a reputation as an unreliable borrower. It is becoming increasingly difficult for her to get a loan or other forms of paid investment.
Analysis of liquidity balance allows you to consider the structure of capital. If deviations or negative trends are detected, timely actions can be taken to eliminate such phenomena. This greatly improves the stability and solvency of the organization. If a company pays its debts on time and develops harmoniously, it becomes attractive to investors. This opens up new perspectives and opportunities for the enterprise. Therefore, liquidity analysis is carried out by any organization.
Own and borrowed funds
Liquidity analysis boo. balance allows you to assess whether the company has enough funds in circulation to pay off its current liabilities. To understand the essence of this study, it is necessary to consider the capital structure of the enterprise.
Each organization has its own capital. It is formed in the form of a statutory fund when creating a company. This capital is contributed by the founders of the organization. There are certain requirements regarding the total amount of equity for a particular form of company organization. This is necessary to avoid bankruptcy of the organization.
The company in the course of its activities makes a profit, which it distributes between the owners or directs to its further development. As a result, its stability is growing. However, not a single enterprise today carries out its activities solely through its own sources of financing.
The fact is that when the formation of the asset balance only due to free resources, increases the financial stability of the organization. But at the same time, the opportunities for the development of the company are limited. This does not allow to stay ahead of the competition by expanding production or introducing new technologies. Therefore, almost all industries today attract borrowed capital to finance their activities. It opens up a host of new opportunities to improve the organization’s core business.
The amount of borrowed capital in the overall balance sheet structure may be different. This indicator depends on the industry in which the enterprise operates. To determine the optimal amount in this situation, apply a system of indicators. The financial leverage (leverage) is calculated.
Analysis of liquidity indicators of the balance sheet allows you to evaluate the effectiveness of the use of own and borrowed funds. If there is too much paid (credit) capital, the company cannot pay its debts. She is losing her investment appeal. As a result, it cannot develop harmoniously. Therefore, the optimal value of borrowed capital in the balance sheet structure is calculated. One of the methods of this work is the determination of liquidity.
Assets
Analysis and assessment of the liquidity of the balance sheet of the organization is carried out according to a fairly simple method. For this, the assets and liabilities of form No. 1 of mandatory reporting are divided into groups. They differ in speed of circulation. The fact is that money is needed for settlements with creditors and other borrowers. It takes time to turn property into this form. The faster the balance sheet item can be turned into money supply, the more liquid it is considered. Each category of funds must be present in the balance sheet in a certain amount. For this, a system of standards is used.
The most liquid assets are cash in cash or on bank accounts. This category of funds is designated A1. To determine the amount of the most liquid assets, it is necessary to add lines 1240 and 1250 of the balance sheet.
The second group includes assets that can be sold quickly (A2). They cannot be converted into money supply instantly. This process can take no more than a year. This category includes receivables. Their amount is reflected in line 1230.
The third category of property (A3) includes slow-moving working capital. These include receivables that will be settled no earlier than one year, as well as stocks. This group also includes value added tax. Deferred expenses are not taken into account in the settlement process. To determine the amount of slowly sold assets, add 1210, 1220, 1260 and 12605 balance sheet items. Liquidity analysis for this category of funds is also required.
The fourth group of assets (A4) includes property that will be difficult to sell. They are exploited in the process of economic activity of the organization for a long time. These are all the funds that are presented in the first section of the asset. These are non-current assets, which are presented in line 1100.
The first three categories of funds are the most liquid. They change their size during the current period. If the funds of the enterprise are concentrated in hard-to-sell assets, it may have difficulties in settlements with creditors.
Liabilities
The balance sheet liquidity analysis (according to the new balance sheet) is carried out by comparing certain groups of assets and liabilities. The capital of the enterprise is also divided into 4 groups. They are formed on the basis of the speed of return of finance to borrowers.
The first group (P1) includes obligations that require payment as soon as possible. These are payments on loans not repaid on time, as well as dividend payments. Their amount is presented in line 1520.
The second group includes short-term loans (P2). These are current bank loans, other paid financing, the maturity of which occurs no later than one year. To calculate their number, it is necessary to analyze information on the maturity of existing debts. This can be done only by the internal analytical services of the enterprise. Third-party investors who calculate liquidity indicators do otherwise. They add lines 1510, 1540, 1550. This is a less accurate analysis, however, it allows us to draw conclusions about the solvency status of the organization.
The third category includes long-term liabilities of the enterprise (P3). The amount of these funds is presented in the corresponding line of the liability (Article 1400). They mature in more than a year.
The fourth group of financial sources (P4) are permanent liabilities. This is other capital, which did not fit into any of the categories listed above. Losses and deferred expenses are deducted from the total funds of this group. To calculate the amount of constant liabilities, add lines 1530, 1300 and 12605.
Group Comparison
To assess the solvency of the enterprise, a comparative analysis of the presented groups is carried out. A certain inequality must be satisfied between them.
Considering the analysis of liquidity balance A1 and P1, you can determine whether the company is able to pay for its most urgent obligations. To do this, he will need the most liquid assets. In this case, the inequality A1> P1 holds. In this case, the organization has enough cash to pay off its term debts.
Next, groups A2 and P2 are compared. In this case, it is determined whether the company is able to pay its borrowers debt on loans with a maturity of up to one year. In this case, the inequality A2> P2 must also hold. There should be more quickly realized assets than short-term debts.
Carrying out the analysis of balance sheet liquidity, 3 and 3 are also compared among themselves. Long-term loans require repayment of more than 1 year. Therefore, the company must have a sufficient amount of resources that can be converted into cash during this time. In this case, the inequality A3> P3 holds.
The listed conditions are obligatory for any enterprise. These are the minimum solvency conditions of the organization. When these conditions are met, the inequality between A4 and P4 is automatically satisfied. Analysis of the liquidity balance sheet suggests that when identifying the correspondence between all groups of assets, the company can pay off with different types of debt. In this case, A4 <P4. The balance sheet is recognized as liquid, and the company is solvent.
Current liquidity ratio
The calculation of the balance sheet liquidity analysis is also carried out using a system of ratios. This allows you to determine the compliance of each type of indicators with established standards.
The most common ratio is current liquidity. It reflects the speed with which all current assets of the enterprise can be realized . This indicator allows you to look at issues of solvency of the company in general. If the company is ready to pay its current debts at the scheduled time, this ratio will correspond to the standard value. Deviations indicate the development of adverse trends. They require adjustment. The current liquidity ratio formula is as follows:
Ktl = OSs / KK, where OSs - the average cost of working capital for the reporting period, KK - short-term capital.
OSc = (OSnach. + OSkon.) / 2, where OSnach. - current assets at the beginning of the reporting period, OScon. - at the end of the reporting period.
The calculation under the articles of the new balance sheet (valid from 2011) will be as follows:
Ctl = (A1 + A2 + A3) / (P1 + P2) = s.1200 / s. 1500
This indicator includes the remaining varieties of liquidity. The indicator must comply with the norm. It is determined for enterprises in each industry separately.
Norm
The objective of the analysis of balance sheet liquidity is to bring the main indicators to the established standards. In general, the considered coefficient should be in the range from 1 to 2. If this requirement is not met, disharmony is determined in the balance structure.
If the presented indicator drops below 1, then the company does not have enough funds to pay for its current obligations. The number of working capital in this case should be increased. Due to what reserves this work should be performed, it will be clear after a subsequent analysis of the components of liquidity. It may also be necessary to reduce the amount of borrowed capital.
To determine what actions would be appropriate in this case, a number of additional studies will be required. The capital structure of the organization should be optimized in accordance with the current situation.
If the current liquidity ratio is higher than the established standard, the company's resources are used inefficiently.
Quick ratio
After determining the current liquidity ratio, other ratios are analyzed. This allows the company management to make the right decisions in this situation. One such indicator is an indicator of quick liquidity. In the composition of working capital there are several categories of operatively sold assets. To perform the calculation, use the following formula:
Kbl = (OSs - Zap) / KK, where Zap - reserves.
The analysis of the balance sheet liquidity for the new balance sheet in this case looks like this:
Kbl = (p. 1200 - p. 1210) / s. 1500
The ratio shows how much of the current liabilities the company will be able to repay at the expense of its rapidly realizable current assets.
Norm
It is necessary to compare the result with the standard, performing the analysis of liquidity balance. For this indicator, it is from 0.7.
If the result is less than the established limit, the organization’s ability to pay its current obligations is significantly reduced. In this case, the company either accumulates a large number of paid short-term sources of financing, or the funds are concentrated in slow-moving assets.
For most companies, it is a positive sign if this type of liquidity rises above 1. This indicates an increase in the stability and solvency of the research object.
Absolute liquidity ratio
Considering the features of calculating the balance sheet liquidity analysis, a few words should be said about such an indicator as an absolute solvency indicator. It describes how much of the current debt the company will be able to repay in the shortest possible time. To carry out the calculations, the amount of all money is determined at the cash desk and on the account of the organization.
Absolute liquidity analysis is rarely used in calculations. But if necessary, determine the causes of insufficient solvency at higher levels, it should be calculated to determine the general condition of the balance sheet structure.
The fact is that many companies do not store a lot of money. This is not practical. Capital must work. Therefore, it is sent to circulation. A relatively small amount of funds is kept in bank accounts. At the conclusion of contracts to repay obligations, money is rarely used. Debt maturity is taken into account in the course of a company's financial activities.
To perform the calculation, use the following formula:
Kal = D / KK, where D is money and their equivalents.
The new balance will require the following calculation:
Cal = s. 1250 / s 1500
The normative value of this indicator for different enterprises is 0.1-0.2. This is the minimum level of funds (cash and non-cash) that the company needs to repay urgent obligations. If the indicator is lower than the established norm, the organization will not be able to pay debts promptly. Exceeding the established level indicates the irrational accumulation of cash and non-cash funds.
Having examined the features of the analysis of balance sheet liquidity, it is possible to determine the correctness of its structure and decide on its optimization.