Analysis of the Operation and Financial Condition of the Enterprise

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(4.22.)Analysis of the Operation and Financial Condition of the EnterpriseThe creditors’ turnover period is estimated by dividing the number of days in ayear by the creditors’ turnover ratio as follows:Accounts payable turnover Number of days in a yearperiod in days =Accounts payable turnover ratioOperating cycle and cash cycleCurrent assets constitute the liquid share of assets and the main characteristic traits ofthose assets are their high turnover rate. The functional role of current assets in theoperating process is vastly different from that of fixed assets. Current assets provideongoing operating activities and constitute the main component part in the flow of businesstransactions: purchases of the production stock increase the amount of short-termliabilities; the stock of goods for sale is increasing in the operating process; sales of goodsprovide with an increase of the available cash assets and an increase of accountsreceivable. This operating cycle repeats itself many times and finally materialises in theflow of cash expenses and income.The operating cycle is comprised of the time period, in which the payment for rawmaterials and components is collected, and the time period, in which the cash from sales ofgoods arrive in an enterprise.Operating cycle = Stock turnover period + Debtors’ payment period (4.23.)The length of the cycle depends on the following values: debtors’ payment period; the period in which consumables and raw materials kept in the warehouse; duration of the technological cycle of operations; period of storage of goods for sale in a warehouse; payment term of trade accounts payable.Cash cycle – period of time within which an enterprise invests its cash assets instock and accounts payable.Cash cycle = Operating cycle – Accounts payable turnover period (4.24.)The shorter the cash cycle, the more efficient is the use of current assts. Cash cyclecan be shortened as follows: by increasing the rate of stock turnover; by extending the creditors’ payment periods; by reducing the debtors’ collection periods; by way of optimisation of the technological cycle of operations.The length of the cash cycle is one of the efficiency measures for the use of currentassets. The shorter the cash cycle, the more efficient is the management of current assts.80
Analysis of the Operation and Financial Condition of the EnterpriseThe operating cycle can be shortened on account of the technological process and thedebtors’ payment period, while the cash cycle can be shortened on account of both theabovementioned factors and by reducing the rate of the turnover of trade creditors.4.5. Profitability measuresProfitability is the return from business activities in percent reflecting how wellan enterprise is doing in terms of gaining profit, and it allows to objectively evaluate thebusiness operations of an enterprise. In some sources of reference the term of profitabilityis defined in different ways:Profitability may be defined in various ways, for example: return from business operations in percent; the capacity to generate enough profit to retain the capital invested and to raisenew capital; measure of efficiency of enterprise operations describing the relationshipbetween the amount of profit and another value, which is interrelated with therespective amount of profit; interest proceeds from the capital invested in an enterprise; relationship between profit mass and investment.The main reference source for profit evaluation and analysis is the incomestatement. There is a range of ratios used in the analysis by considering their dynamicsover several accounting periods. An enterprise is considered to be unprofitable if it doesnot make any profit. If profit is < 0, profitability is also < 0.Profitability measures illustrate the relationship between net turnover and netincome in comparison with the assets of an enterprise. These are usually expressed inpercent. The higher the level of this interest is, the higher the efficiency of an enterprise. Ifthe level of these measures is low, an enterprise faces difficulties of development; if theseproblems are not corrected in due time, an enterprise can expect an operating crisis.The primary measure of profitability is profit. In a very simple sense profitabilityis determined by dividing the profit of an enterprise by its total or equity capital.In the course of profitability analysis usually the amount of capital or propertyemployed or net turnover is assumed as the values affecting the amount of profit.The level of profitability depends on the specifics of the enterprise operations, thestructure of turnover and other factors. There are no absolutes criteria used in evaluation ofthe level of profitability. Its increase, however, (over the previous periods) is being valuedpositively. Continuously low levels of profitability or negative profitability are a proof of afailure in business. If this failure is not corrected an enterprise may face bankruptcy.Enterprise management is interested in increased levels of profitability, as one ofits targets is to gain maximum profit and to provide benefits to the owners and theshareholders.Profitability is described and assessed by three aspects: Trading profitability (return from sales) – demonstrates how much profit has beengained in an enterprise per one unit of net turnover.81
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Analysis of the Operation and Financial Condition of the Enterprise

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