The financial position of the enterprise depends on the results of its production, commercial and financial activities. Uninterrupted production and sale of high-quality products have a positive effect on the financial condition of the enterprise. Failures in the production process, deterioration of product quality, difficulties in its implementation lead to a decrease in funds on the accounts of the enterprise, as a result of which its solvency deteriorates. There is also feedback, since the lack of cash can lead to interruptions in the provision of material resources, and, consequently, in the production process.
It is not uncommon for well-functioning enterprises to experience financial difficulties associated with the insufficiently rational allocation and use of available financial resources. Therefore, financial activity should be aimed at ensuring the systematic receipt and effective use of financial resources, compliance with settlement and credit discipline, achieving a rational ratio of own and borrowed funds, financial stability in order to effectively function enterprises.
Of great importance for early detection of signs of the upcoming crisis situation is the analysis of the financial condition, which will reveal its “weaknesses” and take concrete measures for the financial recovery of the enterprise. Early signs of bankruptcy are associated with the nature of changes in the financial performance of the enterprise, the timeliness and quality of financial reporting and the conduct of audits. These include:
delays in the provision of financial statements and changes in their quality; changes in the balance sheet items on the part of assets and liabilities and violations of a certain proportionality thereof; increase or decrease in inventories; increase in the company’s debt to suppliers and creditors; decrease in the income of the enterprise and a decrease in the profitability of the company, depreciation of shares, the establishment by the enterprise of unrealistic (high or low) prices for its products; unsatisfactory balance sheet structure.
The basis for recognizing the structure of the balance sheet as unsatisfactory, and the enterprise – insolvent is the presence of one of the following conditions:
the current liquidity ratio at the end of the reporting period is less than the normative value, which, depending on the industry affiliation of the enterprise, ranges from 1.0 (trade and public catering) to 1.7 (industry); the ratio of provision of own working capital at the end of the reporting period is less than the established standard, which depends on the industry affiliation of the enterprise. The range of changes in this standard is from 0.1 to 0.3.
The current liquidity ratio characterizes the total provision of the enterprise with its own working capital for conducting economic activities and timely repayment of urgent obligations of the enterprise. It is defined as the ratio of the actual value of the working capital available to the enterprise in the form of inventories, taxes on acquired values, cash, receivables, short-term financial investments and other current assets less future expenses to short-term liabilities of the enterprise, with the exception of future income, consumption funds and reserves for future expenses and payments.
The coefficient of provision of own working capital characterizes the availability of the company’s own working capital necessary for its financial stability. This indicator is defined as the ratio of the difference in equity, including consumption funds and reserves for upcoming expenses and payments, and the actual value of non-current assets to the actual value of working capital available to the enterprise in the form of inventories, taxes on acquired values, cash, receivables, short-term financial investments and other current assets.
In the Republic of Belarus, an enterprise is considered to be sustainably insolvent if it has an unsatisfactory balance sheet structure during the last four quarters. At the same time, in order to recognize a sustainably insolvent enterprise as a potential bankrupt, one of the following conditions is necessary:
the ratio of financial liabilities with assets at the end of the reporting period is higher than the normative ratio (not more than 0.85); the ratio of provision of overdue financial liabilities with assets at the end of the reporting period is higher than the normative ratio (not more than 0.5).
The ratio of security of financial liabilities with assets characterizes the ability of an enterprise to pay off its financial obligations after the sale of assets. It is determined by the ratio of all (long-term and short-term) liabilities of the enterprise with the exception of consumption funds and reserves for upcoming expenses and payments to the total value of property (assets).
The ratio of security of overdue financial obligations with assets characterizes the ability of an enterprise to pay off overdue financial obligations by selling assets. It is calculated as the ratio of overdue financial obligations of the enterprise (long-term and short-term) to the total value of property (assets).
If the value of these coefficients exceeds the level of normative values, then this indicates a critical situation in which the enterprise will not be able to pay off its obligations, even by selling all its property. Such a situation can lead to a real threat of liquidation of the enterprise through bankruptcy proceedings.