. It is necessary to differentiate the solvency of the enterprise, i.e. expected ability to eventually repay the debt, and liquidity of the enterprise, i.e. the sufficiency of available cash and other funds to pay debts at the current moment. However, in practice, the concepts of solvency and liquidity, as a rule, act as synonyms.
Solvency of the enterprise
An important indicator characterizing the solvency and liquidity of an enterprise is own working capital, which is defined as the difference between current assets and short-term liabilities. The company has its own working capital as long as current assets exceed short-term liabilities. This indicator is also called net current assets.
In most cases, the main reason for the change in the value of own working capital is the profit (or loss) received by the organization.
The growth of own working capital, caused by the advance of the increase in current assets compared to short-term liabilities, is usually accompanied by an outflow Money. The decrease in own working capital, observed if the growth of current assets lags behind the increase in short-term liabilities, as a rule, is due to obtaining loans and borrowings.
Own working capital should be easily transformed into cash. If in current assets great specific gravity difficult-to-sell their types, this can reduce the solvency of the enterprise.
Bankruptcy
Decisions made in accordance with the considered system of criteria for declaring organizations insolvent serve as the basis for preparing proposals for financial support for insolvent organizations, their reorganization or liquidation.
In addition, if the organization is unable to repay its short-term obligations, creditors may apply to arbitration with an application to declare the debtor organization insolvent (bankrupt).
Consequently, bankruptcy as a certain state of insolvency is established in a judicial proceeding.
Bankruptcy is of two types:Simple bankruptcy applies to a debtor guilty of frivolity, inconsistency and mismanagement (speculative transactions, gambling, excessive household needs, indiscriminate issuance of bills, shortcomings in maintaining accounting etc.).
Fraudulent bankruptcy is caused by the commission of illegal actions with the aim of misleading creditors (concealment of documents and a certain part of the organization's liabilities, as well as deliberate overestimation of the sources of formation of the organization's property).
In addition to the considered signs that make it possible to classify a given enterprise as insolvent, there are also criteria that allow predicting the likelihood of a potential bankruptcy of an enterprise.
Criteria for bankruptcy of an enterprise:
- unsatisfactory structure of current assets; the upward trend in the share of hard-to-sell assets (inventories with slow turnover, doubtful) may lead to the insolvency of the organization;
- slowdown in the turnover of working capital due to the accumulation of excessive stocks and the presence of overdue debts of buyers and customers;
- the predominance of expensive loans and borrowings in the obligations of the enterprise;
- the presence of overdue and the growth of its share in the composition of the obligations of the organization;
- significant sums accounts receivable written off to losses;
- the trend of predominant increase in the most urgent liabilities in relation to the growth of the most liquid assets;
- decrease in liquidity ratios;
- formation of non-current assets at the expense of short-term sources of funds, etc.
When analyzing, it is necessary to timely identify and eliminate these negative trends in the activities of the enterprise.
It must be borne in mind that current solvency enterprises can be identified from the data only once a month or quarter. However, the company makes settlements with creditors on a daily basis. That's why for operational analysis current solvency, for daily control over the receipt of funds from the sale of products (works, services), from the repayment of other receivables and other cash receipts, as well as to control the fulfillment of payment obligations to suppliers and other creditors make a payment calendar, which, on the one hand, shows available cash, expected cash receipts, that is, receivables, and on the other hand, payment obligations for the same period are reflected. Operational payment calendar is compiled on the basis of data on the shipment and sale of products, on the acquired means of production, documents on payroll calculations, on the issuance of advances to employees, bank statements, etc.
To assess the prospects for the solvency of the enterprise, liquidity ratios.
Enterprise liquidity
The company is considered liquid if it can repay its short-term accounts payable through the sale of current (current) assets.
An enterprise can be liquid to a greater or lesser extent, since current assets include their heterogeneous types, where there are easy-to-sell and hard-to-sell assets.
According to the degree of liquidity, current assets can be roughly divided into several groups.
A system of financial ratios is used to express the liquidity of the enterprise:
Absolute liquidity ratio (term ratio)
It is calculated as the ratio of cash and marketable short-term securities to short-term accounts payable. This indicator gives an idea of how much of this debt can be repaid at the balance sheet date. The values of this coefficient are considered acceptable. within 0.2 - 0.3.
Adjusted (intermediate) liquidity ratio
It is calculated as the ratio of cash, marketable short-term securities and short-term accounts payable. This indicator reflects that part of short-term liabilities that can be repaid not only from available cash and securities, but also from expected receipts for shipped products, work performed or services rendered (ie, from receivables). The recommended value of this indicator is the value - 1:1 . It should be borne in mind that the validity of the conclusions on this ratio largely depends on the "quality" of receivables, that is, on the timing of their occurrence and on the financial condition of the debtors. A large proportion of doubtful receivables worsens the financial condition of the organization.
Current liquidity ratio
General liquidity ratio, or the coverage ratio characterizes the overall security of the organization. This is the ratio of the actual value of all current assets (assets) to short-term liabilities (liabilities). When calculating this indicator, it is recommended to deduct the amount of value added tax on acquired assets from the total amount of current assets, as well as the amount of deferred expenses. At the same time, short-term liabilities (liabilities) should be reduced by the amount of deferred income, consumption funds, as well as reserves for future expenses and payments.
This indicator allows you to establish the proportion of current assets cover short-term liabilities (liabilities). The value of this indicator should be at least two.
There is also an indicator that characterizes security of the organization with its own working capital. It can be defined in one of the two following ways.
I way. Sources of own funds minus (total of section III of the balance sheet liability) (total of section I of the asset balance) divided by (total of section II of the asset balance).
II way. Current assets - Short-term liabilities (total of the V section of the balance sheet liability) (total of the II section of the balance sheet asset) divided by current assets (total of the II section of the balance sheet asset).
This factor must be not less than 0.1.
If the current liquidity ratio at the end of the reporting period is less than two, and the organization's own working capital ratio at the end of the reporting period is less than 0.1, then the structure of the organization's balance sheet is recognized as unsatisfactory, and the organization itself is insolvent.
If one of these conditions is met, and the other is not, then the possibility of restoring the solvency of the enterprise is assessed. To make a decision about the real possibility of its restoration, it is necessary that the ratio of the calculated current ratio to its set value, equal to two, be greater than one.
Balance liquidity
The current solvency of the enterprise is directly affected by its liquidity (the ability to convert them into cash or use to reduce liabilities).
Assessment of the composition and quality of current assets in terms of their liquidity is called liquidity analysis. When analyzing the liquidity of the balance sheet, a comparison is made of assets, grouped by their degree of liquidity, with liabilities for liabilities, grouped by their maturity. Calculation of liquidity ratios makes it possible to determine the degree of availability of current liabilities with liquid funds.
Balance liquidity- this is the degree of coverage of the obligations of the enterprise by its assets, the rate of transformation of which into money corresponds to the maturity of the obligations.
The change in the level of liquidity can also be assessed by the dynamics of the value of the company's own working capital. Since this value represents the balance of funds after the repayment of all short-term liabilities, its growth corresponds to an increase in the level of liquidity.
To assess liquidity, assets are grouped into 4 groups according to the degree of liquidity, and liabilities are grouped according to the degree of maturity of obligations (table 4.2)
Grouping of asset and liability items for balance sheet liquidity analysis| Assets | Liabilities | ||
| Index | Components (lines of form No. 1) | Index | Components (lines of form No. 1 -) |
| A1 - the most liquid assets | Cash and short-term financial investments (line 260 + line 250) | P1 - the most urgent obligations | Accounts payable and other short-term liabilities (line 620 + line 670) |
| A2 - fast-moving assets | Accounts receivable and other assets (line 240 + line 270) | P2 - short-term liabilities | Borrowed funds and other items section 6 "Short-term liabilities" (line 610 + line 630 + line 640 + line 650 + line 660) |
| A3 - slow-moving assets | Articles of section 2 "Current assets" (p. 210 + p. 220) and long-term financial investments (p. 140) | P3 - long-term liabilities | Long-term loans and borrowings (line 510 + line 520) |
| A4 - hard-to-sell assets | Non-current assets (line 110 + line 120 - line 140 + line 130) | P4 - permanent liabilities | Articles of section 4 "Capital and reserves" (p. 490) |
The balance is absolutely liquid if all four inequalities are satisfied:
A 1 > P 1
A 2 > P 2
A 3 > P 3
A 4 < P 4(has a regular character);
The second stage of the enterprise liquidity analysis is the calculation of liquidity ratios
1)Coefficient absolute liquidity - shows what part of short-term liabilities the company can repay immediately in cash and short-term financial investments:
To the absolute\u003d DS + KFV / KO \u003d (p. 250 + p. 260) / (p. 610 + p. 620 + p. 630 + p. 650 + p. 660) > 0,2-0,5
2) Intermediate coverage ratio(critical liquidity) - shows what part of short-term liabilities the company can repay by mobilizing for this short-term DZ and short-term financial investments (CFI):
To crit. liquor\u003d DZ + DS + KFV / KO \u003d (p. 240 + p. 250 + p. 260) / (p. 610 + p. 620 + p. 630 + p. 650 + p. 660) > 0,7 — 1
3) (current ratio), or working capital ratio - shows the excess of current assets over short-term liabilities.
To current specification\u003d OA / KO \u003d (p. 290 - p. 220 - p. 216) / (p. 610 + p. 620 + p. 630 + p. 650 + p. 660) > 2
- Where DC- cash;
- KFV— short-term financial investments;
- DZ- accounts receivable;
- THAT- Current responsibility;
Current liquidity ratio shows how many times short-term liabilities are covered by the company, i.e. how many times a company is able to meet the requirements of creditors if it turns into cash all the assets at its disposal at the moment.
If the firm has certain financial difficulties, of course, it repays the debt much more slowly; additional resources are sought (short-term bank loans), trade payments are deferred, etc. If short-term liabilities increase faster than current assets, the current ratio decreases, which means (under unchanged conditions) that the company has liquidity problems. According to the standards, it is considered that this coefficient should be between 1 and 2 (sometimes 3). The lower limit is due to the fact that current assets must be at least sufficient to repay short-term liabilities, otherwise the company may be insolvent on this type of loan. The excess of current assets over short-term liabilities by more than two times is also considered undesirable, since it indicates an irrational investment by the company of its funds and their inefficient use.
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Liquidity and solvency are distinct, albeit related, characteristics. One of the indicators of the financial position of an enterprise is its solvency, i.e. the ability to timely pay off their payment obligations with cash resources.
"Solvency means that the company has sufficient cash and cash equivalents to pay accounts payable requiring immediate repayment."
Distinguish between current solvency, which has developed at the current time, and prospective solvency, which is expected in the short, medium and long term.
"Current (technical) solvency means the availability of a sufficient amount of cash and their equivalents for settlements on accounts payable requiring immediate repayment. Hence, the main indicators of current solvency are the availability of a sufficient amount of cash and the absence of overdue debt obligations of the enterprise."
Prospective solvency is ensured by the consistency of liabilities and means of payment during the forecast period, which in turn depends on the composition, volume and degree of liquidity of current assets, as well as on the volume, composition and speed of maturation of current liabilities to maturity. In an internal analysis, solvency is predicted based on a study of cash flows. An external analysis of solvency is carried out, as a rule, on the basis of a study of liquidity indicators. In the economic literature, it is customary to distinguish between the liquidity of assets, the liquidity of the balance sheet and the liquidity of the enterprise.
The liquidity of an asset is understood as the ability of its transformation into cash, and the degree of liquidity of an asset is determined by the period of time necessary for its transformation into cash. The less time it takes to collect a given asset, the higher its liquidity. At the same time, one should distinguish between the concept of liquidity of total assets as the possibility of their rapid implementation in case of bankruptcy and self-liquidation of an enterprise and the concept of liquidity of current assets, which ensures its current solvency. This means that each type of current assets must go through the appropriate stages of the operating cycle before being transformed into cash.
The liquidity of the balance sheet is the ability of a business entity to turn assets into cash and pay off its payment obligations, or rather, it is the degree of coverage of the company's debt obligations by its assets, the period of conversion of which into cash corresponds to the maturity of payment obligations.
The qualitative difference between this concept and the liquidity of assets is that the liquidity of the balance sheet reflects the degree of consistency between the volume and liquidity of assets with the size and maturity of liabilities, while the liquidity of assets is determined regardless of the liability of the balance sheet.
"The company's liquidity is more than general concept than the liquidity of the balance sheet. The liquidity of the balance sheet involves finding means of payment only from internal sources (realization of assets). But an enterprise can attract borrowed funds from outside if it has an appropriate image in the business world and a sufficiently high level of investment attractiveness.
Therefore, when evaluating the liquidity of an enterprise, it is necessary to take into account its financial flexibility, i.e. the ability to borrow funds from various sources, increase share capital, sell assets, quickly respond to market conditions, etc.
Thus, the concepts of solvency and liquidity are very close, but the second is more capacious. The solvency of the enterprise depends on the degree of liquidity of the balance sheet. At the same time, liquidity characterizes as Current state calculations and perspective. An entity may be solvent at the balance sheet date but have adverse future opportunities, and vice versa.
SOLVENCY AND LIQUIDITY
The solvency of an enterprise is understood as the availability of a sufficient amount of cash and their equivalents for settlements of accounts payable requiring immediate repayment. Therefore, the main signs of solvency: a sufficient amount of funds and the absence of overdue accounts payable.
The liquidity of any asset (property) is its ability to be transformed into cash. The degree of liquidity of an asset is determined by the duration of the period of time required for its transformation into cash in the course of the envisaged production and technological process.
There is also the concept of the liquidity of an enterprise, which is understood as the presence of current assets in it, the amount of which is theoretically sufficient to repay short-term liabilities, even if they do not meet the maturity dates stipulated by the terms of the contracts.
Assessment of the level of liquidity and solvency
The liquidity level of an enterprise can be assessed using liquidity ratios based on a comparison of current assets and short-term liabilities (liabilities).
In the process of economic activity of the enterprise through it all the time there is a flow of cash from the repayment of receivables. Each receipt reduces the amount of receivables, which over time increases again due to the sale on credit to consumers of a new batch of the company's products. Therefore, to increase sales, the company must increase the stock of finished products, which will lead to a decrease in inventories and work-in-progress residues.
When assessing liquidity proceed from the need to maintain a balance between non-current assets and long-term sources of funds.
Otherwise, the current position of the enterprise is unstable, and there is a high probability of a situation where it will not be able to fully pay off its obligations.
Thus, the current solvency of the enterprise is directly affected by the degree of liquidity of its current assets. However, it should be borne in mind that solvency and liquidity are not identical. For example, liquidity ratios may indicate a satisfactory position of the enterprise, but if assets of dubious actual value have a significant share in the current assets of the enterprise, then such an assessment will be erroneous.
It should also be borne in mind that the financial condition of the enterprise in terms of solvency is more dynamic compared to liquidity, because as the production activity of the enterprise stabilizes, a certain structure of current assets and sources of funds is formed, sharp changes in which are rare. Solvency, on the contrary, can change quite quickly, and both its accidental loss and long-term loss are possible. Therefore, in order to maintain solvency, it is necessary to maintain an insurance reserve of funds.
INTERNAL ASSET AND LIABILITY ANALYSIS
To obtain more reliable information about the state of the enterprise before assessing liquidity, it is advisable to conduct an internal analysis of current assets and short-term liabilities, for example, by grouping them depending on the degree of liquidity. This analysis can also be useful for evaluating financial results enterprise activities.
LIQUIDITY RATES
Liquidity and solvency are assessed using absolute and relative indicators. The absolute indicator is the value of own working capital. Relative indicators include:
current liquidity ratio;
Quick liquidity ratio;
Absolute liquidity ratio.
Liquidity ratios are calculated by referring current assets or their individual items to short-term liabilities. The use of these indicators also has its drawback - the attachment of calculations to a specific date, which inevitably raises the need to analyze their dynamics over several periods.
THE IMPACT OF MANAGEMENT DECISIONS ON THE SOLVENCY OF THE ENTERPRISE
In the process of making decisions, the management of the enterprise must remember the following:
Liquidity and solvency are the most important characteristics of the rhythm and sustainability of the current activities of the enterprise;
Any current transactions immediately affect the level of solvency and liquidity;
Decisions made in accordance with the chosen policy for managing current assets and sources of their coverage directly affect solvency.
At the same time, the solvency of an enterprise is determined by the structure and qualitative composition of current assets, as well as the speed of their turnover and its correspondence to the speed of turnover of short-term liabilities.
If an enterprise slows down the turnover rate of current assets, and the management does not take measures to attract additional financing, it may become insolvent, even if its activity is profitable.
Finally I note that any decisions aimed at changing the structure or size of current assets directly affect the solvency of the enterprise, for example:
The decision to purchase an additional batch of raw materials in addition to the already existing stocks due to the expected increase in prices will lead to an increase in the amount of cash in inventory;
The decision to increase sales will require the involvement of additional sources of financing. It should be borne in mind that the company has limited opportunities to increase production and sales within the existing structure of current assets and sources of their financing;
The decision to increase the deferral of payment for delivered products is likely to extend the dead time of cash in receivables, etc.
To determine the financial condition of the enterprise, a huge number of indicators related to different directions his activities. The final characteristics are liquidity and solvency, which, although they reflect the real state of affairs in the enterprise, still carry a different semantic load. To understand what their difference is, it is necessary to identify the essence that they mean by themselves.
Definition
Liquidity- the ability of the assets available at the enterprise to quickly turn into cash, that is, they must be realized as soon as possible, and their sale price should be approximately equal to or higher than the market value. In this regard, according to the degree of speed of turnover into money, several types of assets are distinguished - illiquid, low-liquid, medium-liquid and highly liquid.
Solvency implies the ability of the enterprise to pay off its debts and obligations at the expense of its available funds. If the solvency of the company is at a sufficiently high level, we can say that it is financially stable, that is, it has a low probability of going bankrupt.
Comparison
The concept of liquidity refers to the assets of the enterprise, since only they can be converted into cash, while liabilities do not have a similar characteristic. Liquidity has a certain range of values, according to which assets belong to one or another level of this indicator.
Solvency is related to both assets and liabilities, since it is defined as the ratio between these two balance sheet items. If an enterprise has a large stock of highly liquid assets, then it is able to pay its obligations, which indicates a high level of solvency of the enterprise. Simply put, solvency directly depends on the degree of liquidity of a particular asset of the company.
Findings site
- Solvency is a broader indicator that depends on the level of liquidity of the enterprise.
- The liquidity of assets has several levels, while solvency fluctuates only within a certain range.
- Liquidity refers to the assets of the balance sheet, and both assets and liabilities of the enterprise are used to calculate solvency.
IVANOV V.V.
Doctor of Economic Sciences, Professor, St. Petersburg State University
Liquidity and solvency of the company: general and special
In conditions of economic instability, high levels inflation, financial managers are primarily designed to ensure survival, liquidity and solvency, i.e. maintain the organization's ability to timely settle its obligations.There are no unambiguous interpretations of the concepts of liquidity and solvency of an enterprise in the literature. In the literature, the liquidity of an enterprise is most often understood as the presence of working capital in an amount theoretically sufficient to repay short-term obligations (albeit with a violation of the repayment periods stipulated by contracts). With this interpretation, the concept of company liquidity is directly related to the concept of own working capital or, as this indicator is often called, “net working capital” or “working capital”, which is defined as the difference between current assets and current liabilities (short-term liabilities). A company is said to be liquid if net working capital is positive. This indicator does not contain information about the quality of current assets and liabilities. This concept of interpreting liquidity is based on the idea of the movement of funds and is associated with income and expenses (receipts and payments) for certain periods of time, which are recorded in accounting.
Solvency is considered through the prism of the company's cash and cash equivalents sufficient to settle its obligations in each period under consideration. Accordingly, the main signs of solvency are the absence of overdue accounts payable and the availability of sufficient funds in the current account.
Thus, the concept of liquidity characterizes the company's potential ability to pay for its obligations, and the concept of solvency - a real opportunity to fulfill its obligations.
If liquidity is associated with the movement of funds, then solvency is associated with the movement of funds. The movement of funds and the movement of cash are interrelated. This connection is implemented in general case through the time function of the transformation of assets into direct means of payment.
A company's liquidity is assessed primarily on the basis of historical data contained in its balance sheet. The liquidity of a company depends, on the one hand, on the availability of payment claims against it, on the other hand, on the availability of potential payment resources. Thus, if a company's potential means of payment at any given time exceed its payment obligations, then it can be considered liquid.
There are four types of liquidity: commodity liquidity, borrowed liquidity, future liquidity and expected liquidity. Commodity liquidity is based on the ability of goods and goods to transform into means of payment. This ability depends mainly on the buyer's search time, the state of the market, the impact of which induces the buyer to purchase the relevant goods, benefits; from the costs of finding a buyer and, finally, from specifications goods and selling prices. Thus, the payment resources of the company will be determined by the commodity liquidity of the assets.
The company's payment resources can be increased by obtaining loans secured by its property. Depending on the terms of the loan agreement, the company may use the collateral to generate income. It should be borne in mind that credit institutions set the value of collateral significantly below its market value. That's why this option an increase in the company's payment resources may be acceptable if it is able to repay the loan and interest in a timely manner. Liquidity, determined by the possibility of obtaining loans against available inventory, is called borrowed.
Estimating a company's liquidity based on its current assets does not take future earnings into account. Such an approach would make sense in the event of a liquidation of the company. Therefore, it would be more logical when planning liquidity to take into account possible future receipts and payments in order to more reasonably determine its means of payment. Evaluation of the company's payment resources, taking into account future receipts and payments, characterizes its future liquidity.
Loans can also be secured against future earnings. In this case, it is provided to a greater extent on the trust in the borrower, because. ensuring the accuracy of forecasts of future revenues is an extremely difficult task, if at all it can be considered feasible in the context of dynamic changes in the external and internal among the enterprise. Ensuring payment obligations from receipts, including through obtaining credit resources against future receipts, is considered as expected liquidity.
So, let's ask ourselves a question: what kind of liquidity can be assessed on the basis of the balance sheet and information from the income statement? Consider the current balance for the reporting period. Is it possible to determine the real volume of the company's payment resources on its basis? It seems that this is very difficult to do, given that:
The valuation of the property in the balance sheet does not correspond to its market value, taking into account the costs of implementation;
- the balance sheet may contain assets that, upon liquidation of the company, will not bring any income;
- the balance sheet may contain assets that are under pledge;
- the balance sheet may contain liabilities of the company that are not related to liabilities to third parties.
These obvious shortcomings of the information content of the balance sheet for assessing future liquidity in theory and in practice are trying to be eliminated by calculating and comparing various indicators with each other; with certain "recommended" values of calculated indicators obtained on the basis of the identified statistical dependencies characteristic of a large set of solvent and insolvent companies in various industries.
The question of the correctness of classifying companies as liquid or illiquid on the basis of calculated indicators based on the results of past activities, or predicted results based on pre-established proportions between individual balance sheet items is open. The fact that creditors and investors use and see the relationship between the numerical values of individual calculated indicators and future liquidity as a whole indicates the practical applicability of existing theoretical approaches to assessing a company's liquidity based on balance sheet data. At the same time, it should be pointed out that along with the liquidity assessment based on the balance sheet, an approach based on the assessment of net cash flow is also used, which shows the presence of a shortage or surplus of funds at the end of the planning period.
