Solvency of the enterprise: objectives, analysis and indicators

First, let's define the subjects and objectives of financial analysis. The firm's inability to make settlements with counterparties can lead to the loss of both its own and attracted financial assets. Therefore, the solvency of the enterprise worries not only its owners, but also other market players (counterparties). The subjects of external analysis of economic activity are business partners, investors and creditors. They study the degree of financial risks and property status for deciding on cooperation. In the case of bankruptcy proceedings, the analysis is conducted by a specially involved arbitration administrator.

Regardless of the organizational and legal form, the internal assessment of the company's solvency has the following objectives:

• determining the degree of the ability of the analysis object to fulfill its obligations;
• ensuring the stability of all processes;
• Observance of the financial interests of the owner;
• finding additional sources of development;
• Ensuring the financial stability of the entire enterprise in the long term.

Correctly organized accounting and regularly conducted audit will allow to control solvency of the enterprise, to reveal hidden reserves and unsuccessful decisions in management of financial flows.

Methods of analysis

Financing practitioners use several approaches to calculate and analyze the solvency of the enterprise. More informative are:

• calculation of cash flows;
• calculation of liquidity indicators.

The cash flow method is used to regulate and manage the financial activities of an enterprise. You can calculate cash flow in direct or indirect ways. The first is to compare the revenue side with the expenditure side. This method allows you to draw conclusions about the sufficiency of funds to fulfill financial obligations. The indirect method demonstrates the relationship between profit and changes in cash flows. The result - a measure of cash-flow for different types of activity - an assessment of the effectiveness of financial management. Analysis of the components of cash flows demonstrates the structure of the sources of funds and the direction of their infusions.

Much less often use methods of analyzing the liquidity of cash flows and constructing a factor model.

Liquidity indicators

Such indicators of the company's solvency, as liquidity ratios, are calculated using the ratio of the relevant asset lines and the balance sheet. The obtained coefficients are compared with the normative, planned or previous values. Comparison in the dynamics allows to assess the financial position of the object of analysis in the current period.

To analyze the solvency of an enterprise, the following main factors are applied: total, absolute and current liquidity. Auxiliary are the coefficients of maneuverability, provision of own funds, critical evaluation and the share of working capital in assets.