Profitability indicators of the enterprise and the procedure for diagnosing their economic insolvency

The indicators of profitability of the enterprise largely depend on the timely diagnosis of the economic insolvency of the organization. And profitability indicators of production are the starting point for its financial recovery, reorganization or timely liquidation.

The diagnostic mechanism is based on the following sequential actions:

1) evaluation of business entities and identification of organizations with unsatisfactory balance sheet structure ;

2) revealing the dependence of the received estimates on the state's obligations to such organizations:

A) if it is established that the insolvency of the organization is not directly related to the obligations of the state, this fact is the basis for making a decision on changing the management of the organization, prioritizing its privatization or applying to the economic court for initiation of the bankruptcy procedure;

B) if it is established that the insolvency of the organization is related to these obligations, then it does not give grounds for the application of the aforementioned liability measures in relation to the management of the organization and the organization itself;

3) it is determined, what are the indicators of profitability (trade enterprise, service enterprise, manufacturing enterprise).

As part of these activities, objective assessment of enterprises and profitability indicators of an enterprise are of primary importance, which completely predetermine the possibilities for assessing the activities of diagnosed enterprises.

The importance of the practical significance of assessing the financial situation makes certain requirements for its reliability and objectivity and, as a consequence, the procedure for its implementation.

To assess the organizations, the relevant instruction is used, adopted by the decree of the Ministry of Finance and the Ministry of Economy.

The basis for recognizing the enterprise as economically insolvent is the existence of a situation in which the profitability of the enterprise and the values of the estimated indicators are less than their normative values. The normative values of these coefficients are differentiated in the main branches of the sphere of material production.

In the course of practical approbation, it became clear that the application of the instruction gives grounds to consider unsatisfactory the financial condition of a very large number of industrial enterprises. However, a detailed study of the state of affairs at these enterprises revealed a large number of fairly successful entities that receive profits and regularly pay salaries to staff, taxes to the state and having quite satisfactory profitability indicators of the enterprise. In such a situation, there is a need to improve the evaluation criteria specified in this manual.

For all the significance reflected in the instructions of the indicators, they were clearly not enough for an objective, reliable assessment of economic insolvency. The solvency of a modern market enterprise can not be characterized only by the current liquidity of its assets.

First, the current liquidity is an intermediate characteristic of the state of the company's finances. Through the implementation of effective (ineffective) transactions by the enterprise, its liquidity at some point may be, and restored (lost) without a particularly tangible impact on its solvency and financial reputation in general.

Secondly, the solvency of enterprises in modern, dynamically developing market conditions depends not so much on liquidity of assets as on the quality of daily cash flows.

The indicator of the organizations' own resources can not be used for objective assessment. For example, with high business activity of enterprises, the impact on their finances of an unsatisfactory balance structure will be short and time-consuming in nature.

Financial condition, as is known, is the most complicated economic category, formed under the influence of three main components: solvency, financial stability and business activity. Taking into account the universally recognized multifactority of the phenomenon under investigation, in our opinion, it is required to form a system of evaluation indicators, avoiding a very attractive practice of minimizing their number. The diverse composition of the estimated indicators will contribute to a reliable assessment of the financial status of organizations and the identification of them economically untenable.