Balance liquidity assessment as one of the methods of financial analysis

The activity of any enterprise is quite a multi-faceted process and consists not only of production, but also of sales, and from the organization of financing, and from other components. In this regard, the analysis of the enterprise should also be multifaceted. Moreover, this concerns the analysis of the financial situation. It would be very problematic to describe all aspects of this type of analysis, so we will dwell in more detail on studying the liquidity of an enterprise using a method such as assessing the liquidity of a balance sheet.

The category of liquidity in general is general economic and characterizes the ability of a property in the shortest time and, if possible, without loss, to acquire a monetary form. Often, this concept applies to bonds, shares and other things, but it is the portfolio of securities that is primarily valued in terms of risk and return.

In relation to the enterprise, the concept of liquidity characterizes its ability to fully and without delay to settle its debts. In order to conclude whether the enterprise meets this criterion, an assessment of the liquidity of the balance is carried out. The simplest and most frequently used technique is to compile a liquidity balance. The essence of this method consists in additional grouping of assets and liabilities for liquidity and urgency, respectively. Then there is a comparison of a certain group of liabilities with assets, the period of transformation of which into a cash form is similar to the maturity of liabilities. Most analysts use the creation of four groups on each side of the balance sheet, although no one prevents you from using a larger number of less aggregated groups.

First, let's look at how groups of assets are formed. The first consists of absolutely liquid assets. In other words, this includes money, as well as property that can also be considered conditionally money - short-term financial investments. The second group consists of assets that can be quickly converted into a cash form. These include accounts payable, the repayment of which is expected during the year, as well as other current assets. The property of the third group turns into a monetary form, either much more slowly, or with a greater loss of value. These are stocks and financial investments for a long time. Everything that was not included in the first three groups forms the fourth. This property is most difficult to acquire a monetary form, and therefore, the least liquid.

Estimation of liquidity of the balance sheet will be incomplete if we are not comparable with the assets of liabilities, so we turn to the consideration of the groups on the second side of the balance sheet. The liabilities of the first group include the most urgent debts, that is, accounts payable and other liabilities with a maturity of less than a year. All other short-term debts are summarized and are the second group. Long-term obligations are fully included in the third group, and the result of the third section of the balance can be written without any scruples of conscience as the sum of the fourth group, also called permanent liabilities.

After the creation of the groups, it is necessary to compare them among themselves by subtracting corresponding liabilities from the assets. If this difference is positive, then there is a payment surplus, or else a defect. The condition of absolute liquidity is the presence of excess in the first three groups, but the disadvantage of the fourth. This very shortcoming is very important, since it characterizes the availability of own circulating assets at the disposal of the firm.

If the described condition is not observed, then it is necessary to take measures to normalize the financial situation in terms of liquidity and solvency. More fully assess the current situation can be, if not only an assessment of the liquidity of the balance sheet, but also the analysis and assessment of profitability, as well as financial stability.