Analysis of the Operation and Financial Condition of the Enterprise

More documents

Recommendations

Info

Analysis of the Operation and Financial Condition of the Enterprisehappen. The shorter this period is the more liquid is each given element of assets. Liquiditymeasures is the capacity of an enterprise to execute any payments and debt settlementswith creditors on a due date and in a certain amount. Liquidity is the key issue in thefinancial performance of an enterprise. The objective of the enterprise performance is toensure a constant, sufficient amount of the means of payment.Liquidity can be discussed from two points of view: From the point of view of dissolution of an enterprise, i.e., it should be specified whatmeans of payment would be there at the disposal of an enterprise that could beallocated to meet the liabilities if an enterprise should undergo the process ofdissolution due to insolvency or insufficient profitability. In order to find an answer tothis question the following information is required: on revenues that an enterprise couldacquire in the case of potential dissolution from the disposal of its property; the amountof preferential claims; the amount of a secured loan. Such information cannot be foundin the financial statements. This means that in the process of the annual report analysisliquidity in this aspect is not discussed. Liquidity is discussed in this way when thecrediting arrangements are being established. From the aspect of the enterprise as a going concern; the probability that an enterprisecould become insolvent and could be forced into liquidation should be assessed.However, as the information found in the financial statements is based on the goingconcern principle, while analysing the balance sheet liquidity may be discussed onlyfrom this perspective. Information regarding liquidity is crucial as insolvency causesthe threat of winding up the operations of an enterprise. Businessmen and analysts areinterested in the future liquidity figures and not those of the past. The anticipatedliquidity figures cannot be found out merely according to the data of accountingreports, but the data from the finance planning must be extensively used. A profitableenterprise is usually also solvent as it has access to sufficient credit resources.There are several disadvantages of the liquidity measures: they are static – presented ratios are calculated based on the balance sheet datawhich describe the property status as of a certain date, therefore, to assess thechanges in the ratio it is recommended to view them in dynamics or compare withthe ratio level of other similar enterprises; they provide little information for the forecasting of future revenues and expenses,however, this is exactly the main current solvency task; incomplete accounting for enterprise liabilities (if there is a choice to present a loanin the balance sheet with or without the interest). Classification of assets depends on changes in the economic conditions. It isnot fixed, but varying (unstable deliveries and high inflation). Peculiarities of the areas of enterprise activities and the working capital.This ratio can be increased in two ways: By increasing the amount of individual items of current assets; By reducing the amount of short-term liabilities.68
Analysis of the Operation and Financial Condition of the EnterpriseUsually it is believed that the higher the liquidity ratio, the higher the liquidity ofan enterprise. However, not always, as the calculation method of this ratio has a fewdrawbacks: Let us assume upon calculation of the ratio that all current assets are liquid.This assumption may be unrealistic, especially in respect of inventories; The ratios may be increased as a result of unfavourable processes; Liquidity ratios may on some occasions be transferred into the opposite –the liquidation ratio. Only in the case of liquidation an enterprise sells a largeamount of stock in order to repay its short-term liabilities; This ratio reflects a static situation – the status as of a certain date. Turnoverof assets is not taken into consideration in the calculation.Due to these reasons when making analysis of the enterprise liquidity a variety offactors need to be considered by drawing conclusions from the liquidity ratios calculated.For example, the specifics of the enterprise operations must be taken into account. Inproduction or construction enterprises there will be a considerable excess of the percentageof stock over cash assets than in enterprises operating in trade. The application of thedebtors’ collection policy also needs to be taken into account. If there is a short debtcollection period, the balance sheet will reflect a small amount of debt, while a long periodof collection may be reflected in the balance sheet as a considerable amount of debtors’debts. It has to be noted also what is the structure of stock and accounts receivable in anenterprise. Neither the non-liquid stock, nor bad debtors for which an adjustment has notbeen made do reflect the true financial position of an enterprise. Also the relationshipbetween short-term and long-term assets from the total enterprise property, the relationshipbetween unrealisable and readily realisable assets from total assets, the relationshipbetween current assets and short-term liabilities (the dynamics of the cover ratios), thedynamics and the reasons for changes in own working capital, the rate of own workingcapital in the structure of current assets has to be taken into consideration too.According to the degree of liquidity current assets may be sub-classified intothree groups, they each differ by composition of current assets accepted as a cover for therepayment of short-term liabilities: highly liquid assets which are readily realisable (cash assets).These are liquid assets that are at the disposal of an enterprise (customers’ debts, liquidsecurities listed on the stock exchange); less liquid assets at the disposal of an enterprise (stock of materials for goods:goods, work in progress, stock of raw materials); non-liquid assets (doubtful debtors’ debts, semi-finished goods, prepaid expenses).Enterprise cash in till and on the bank account are believed to be the most liquidassets among current assets. Liquidity ratios associated with these assets are called theoverall liquidity ratio (current ratio) and it is expressed as the ratio between current assetsand current liabilities.OverallCurrent assets69
Page 1 and 2:
Analysis of the Operation and Finan
Page 3 and 4:
Page 5 and 6:
Page 7 and 8:
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18: Analysis of the Operation and Finan
Page 67: Analysis of the Operation and Finan
Page 103 and 104: Dec.,2XX7Analysis of the Operation
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Terms of ReferenceAnalysis of the O
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Page 137 and 138:
Page 139 and 140:
Page 141 and 142:
show all

Analysis of the Operation and Financial Condition of the Enterprise

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?