Analysis of liquidity of the enterprise

Quite often the enterprise faces a very unpleasant situation, when according to the financial statements it has impressive assets, however, while not being able to repay its urgent debt. This becomes possible due to the fact that most of the assets of the enterprise are illiquid, i.е. Can not be sold or exchanged for cash that can be used to repay the debt.

An enterprise that does not monitor liquidity indicators risks being declared bankrupt even if it steadily makes a profit. That is why the liquidity analysis of the enterprise is no less important than the analysis of profit. Liquidity, in general, is translated literally, as flexibility and means in management the ability to transfer an asset into a cash equivalent. The longer the time required for the transfer, the less liquid the asset is. For example, intangible assets are almost completely non-liquid, and the most liquid are cash.

However, cash makes up a small part in the structure of the assets of the enterprise, and they are usually enough only to pay off daily small expenses, like buying a kettle for the office. As for large payments for debts, in order to find liquid funds at the right time, the company must conduct liquidity and financial stability analysis.  

The enterprise needs to carefully plan the flow of funds, as well as the terms in which the most non-liquid assets will be exchanged for liquid assets. However, all kinds of mistakes and confusions often occur. For example, an enterprise can not always receive for an asset the amount of money that it has been valued. In this case, it may find itself in a situation of lack of funds to pay the current debt. A similar situation is indicated as the liquidity risk of an enterprise.

In order to minimize this kind of risk, an enterprise should consistently maintain a reserve of liquid assets at an optimal level. Such reserves are monitored using special liquidity ratios. The main factor included in the liquidity analysis of the enterprise, Is a coefficient reflecting current liquidity. It determines how many times the volume of current assets is greater than the volume of current liabilities. The minimum allowable value for this coefficient is two.

However, not all current assets can be changed for money in a critical situation, for example, when almost all major creditors require a debt repayment. Particular danger is represented by inventories, since they can not always be sold at book value. Therefore, the liquidity analysis of the enterprise Involves the exclusion of them from the list of current assets, when calculating the indicator of quick liquidity. This indicator should not be lower than one.

Despite the fact that all assets under consideration can be converted into cash quickly enough if an enterprise needs money right now, it can face certain problems if it does not maintain the absolute liquidity at the optimal level - at least 0.2. When calculating this indicator, only those assets that can be exchanged instantly (cash and non-cash money and some securities) are taken into account.

The liquidity analysis of an enterprise based on the above factors not only allows the company's managers to effectively manage its obligations, but it also signals to the creditors that the company is in order and it can return the funds allocated to it in time. Therefore, it is so important to maintain all indicators at the optimum level.