Balance liquidity assessment as one of the methods of financial analysis
The activities of any enterprise area fairly multifaceted process and consists not only of production, but also of sales, and from the organization of financing, and from 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. To describe all aspects of this type of analysis will be very problematic, so we will dwell in more detail on the liquidity of an enterprise using such a method as the estimation of liquidity of a balance.
The liquidity category is generallygeneral economic and characterizes the ability of a property in the shortest time and, if possible, without loss, to acquire a monetary form. Often, this concept applies to bonds, shares and other things, but it is the portfolio of securities that is primarily valued in terms of risk and return.
In relation to the enterprise, the concept of liquiditycharacterizes his ability in full and without breaking the deadlines to make settlements on his debts. In order to conclude whether the enterprise meets this criterion, an assessment of the liquidity of the balance is carried out. The simplest and most frequently used methodology is the preparation of a liquidity balance sheet. The essence of this method consists in additional grouping of assets and liabilities for liquidity and urgency, respectively. Then there is a comparison of a certain group of liabilities with assets, the period of transformation of which into a cash form is similar to the maturity of liabilities. Most analysts use the creation of four groups on each side of the balance sheet, although no one prevents you from using a larger number of less aggregated groups.
First, let's look at how thegroup of assets. The first consists of absolutely liquid assets. In other words, this includes money, as well as property that can also be considered conditionally money - short-term financial investments. The second group consists of assets that can be quickly converted into a cash form. These include accounts payable, the repayment of which is expected during the year, as well as other current assets. The property of the third group turns into a monetary form either much more slowly, or with a greater loss of value. These are stocks and financial investments for a long time. Everything that was not included in the first three groups forms the fourth. This property is most difficult to acquire a monetary form, and therefore, the least liquid.
The estimation of liquidity of balance will be incomplete ifwe are not comparable with the assets of liabilities, so we turn to the consideration of 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 maturity of less than a year. All other short-term debts are summarized and are the second group. Long-term obligations are fully included in the third group, and the result of the third section of the balance can be written without any scruples of conscience as the sum of the fourth group, also called permanent liabilities.
After creating groups, you need to compare them betweenby subtracting the corresponding liabilities from the assets. If this difference is positive, then there is a payment surplus, or else a defect. The condition of absolute liquidity is the presence of an excess of the first three groups, but the disadvantage of the fourth. This very shortcoming is very important, as it characterizes the availability at the company's disposal of its own working capital.
If the above condition is not met, thenIt is necessary to take measures to normalize the financial situation in terms of liquidity and solvency. More fully assess the current situation can be, if not only an assessment of the liquidity of the balance sheet, but also the analysis and evaluation of profitability, as well as financial stability.