Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the EnterpriseIn the horizontal analysis of the main balance sheet items such positions asintangible assets, stock, prepaid expenses, shareholders’ or share capital have not beenincluded as the values of these positions do not constitute a material amount in the balancesheet.The balance sheet item ‘Land, buildings, constructions and long-term plants’ on itsturn, has not been included in the horizontal balance sheet analysis as its value does notchange considerably over the entire period under review. This value is only reducing bythe amount of fixed asset depreciation. Due to the same reason the item of the balancesheet ‘Short-term loans’ has not been included in the analysis.The balance sheet item ‘Long-term loans’ has not been included in this analysiseither as there are almost no changes taking place except in the very first period underreview. The reason for this is that the enterprise had purchased cars for own needs onleasing. This is also reflected in the enterprise balance sheet as at the end of period ended31/03/2XX8, when long-term loans have increased by about five and a half thousand CU,there is an increase in the fixed asset and inventory value seen by almost eleven and a halfthousand CU.It can be sensed from Table 2.1 that the total amount of enterprise assets increasesuntil 31/03/2XX9 except the end of 2XX8, after which there can be again an increase intotal assets viewed in the first quarter of 2XX9, while from March of 2XX9 till the end ofSeptember a decrease in the total amount of assets can be observed. This is due to the twolarge unsuccessfully implemented projects of the enterprise as the profitability level ofthese projects was below the projected level of profitability. The problem of costeffectivenesswill be discussed later when the profitability policy of the enterprise will beanalysed. The amount of equity capital in the enterprise has decreased rapidly starting withMarch, 2XX9, as the enterprise has been operating at a loss. On the other hand, theenterprise became aware of its financial position in May, 2XX9, adopted the decision forcost optimisation for further projects, and any changes in this respect can be felt alreadystarting from September, 2XX9.From the data in Table 2.2 it can be seen that the total asset value of the enterpriseincreases until 31/03/2XX9 except at the end of 2XX8, when the decrease in this value ismainly due to the rapid fall in the amount of work in progress.Attention should be also paid to accounts receivable and accounts payable of theenterprise. Almost in the entire period under review until the middle of 2XX9 these twobalance sheet items have a tendency to increase. There is a decrease in the accountsreceivable starting with 31/03/2XX9 as extra work has been input in accounts receivablewhich has brought in some results. This will be discussed in more detail in the section oncurrent asset management including the management of accounts receivable. Debts tocreditors, on their turn, have also decreased, starting with 30/06/2XX9.Relative changes in the asset values are shown in Table 2.3 in the annex. There is atendency to increase in the total value of assets compared to the preceding period, whilethe total amount of assets reduces starting from 31/03/2XX9 as the profit of the enterprisehas declined by 1035% in the period following 31/03/2XX9, the enterprise was actuallyoperating at a loss of more than 150 thousand CU at the moment.In order to obtain a full picture of the enterprise performing the horizontal balancesheet analysis is not sufficient. It is also required to perform the horizontal analysis of the92
Analysis of the Operation and Financial Condition of the Enterpriseincome statement as by having a look at the net turnover of the enterprise in Table 4 (seethe annex) ‘Income statement of the Enterprise N for the period from 31/12/2XX7 to31/12/2XX9’ the explanation for the trend of increase in the total assets can be found, asthe increase in net turnover until the third quarter of 2XX8 is boosting; the decrease in thenet turnover for the last quarter is due to the seasonal character of turnover in theconstruction business. The fact that starting with the end of March, 2XX9, the rates ofincrease in net turnover of the enterprise are rising is also explained by the seasonalchanges.In Table 5 (see the annex) it can be seen that in the second quarters of the year thenet turnover of the enterprise is less than the cost of goods sold as during this period theenterprise is investing money in projects which it not necessarily gets back in the followingmonth, therefore, during these periods the enterprise is working at a loss.Although the average quarterly net turnover is 282,7 thousand CU, it can be seenthat in the first quarter of 2XX9 the amount of net turnover is only slightly below theaverage, being higher during the rest of the year, but more importantly the turnover of theenterprise is more levelled than that in year 2XX8.5.2. Liquidity ratio analysis of Enterprise NOverall liquidityIn estimating this measure the overall liquidity calculation formula 4.1 must beapplied. In order to arrive at the overall liquidity value information about the total amountof the enterprise current assets and short-term assets should be available (see the data inTable 1 of the annex).Table 5.1Estimation of the Enterprise N overall liquidity for the period from 31/12/2XX7 to31/12/2XX9 (in CU)Dec.,2XX7March2XX8June,2XX8Sept.,2XX8Dec.,2XX8March2XX9June,2XX9Sept.,2XX9Dec.,2XX9Total currentassets 167 806 210 557 241 778 343 779 318 301 476 754 386 462 296 149 304 415Currentliabilities 192 442 217 224 315 697 296 244 327 454 470 252 545 623 477 655 418 595Overallliquidity 0,87 0,97 0,77 1,16 0,97 1,01 0,71 0,62 0,73It can be seen according to Table 5.1 that the overall liquidity in the period underreview is below standard as it is recommended that the overall liquidity ratio is within thelimits from 1 to 2 (3 on some occasions). The value of liquidity has only been slightlyabove the critical limit of 1 at the end of September 2XX8 (1.16) and in March, 2XX9, -1.01.This means that the enterprise is having problems with paying its suppliers in duetime. By knowing that a major supplier has authorised a credit line to the enterprise withthe limit of 40,000 CU available for one year with the option of extending it for one more93
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Analysis of the Operation and Financial Condition of the Enterprise

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