Liquidity and solvency as key performance indicators of the enterprise

Table of contents: The Kazakh-American Free University Academic Journal №11 - 2019

Toleukhanova Aziza, Kazakh-American Free University, Kazakhstan
Nepshina Victoria, Kazakh-American Free University, Kazakhstan

Domestic enterprises are faced with the need to optimize their financial activities during a crisis, devaluation of the national currency, difficulty in accessing foreign capital and falling disposable incomes of the population.

Solvency and liquidity are one of the most important indicators of the financial and economic functioning of an organization in a market economy. If the organization is solvent, then it has several advantages compared with its competitors in this field of activity.

Analysis and evaluation of the solvency and liquidity of the enterprise is becoming increasingly important at the present stage of economic development. Solvency and liquidity indicators determine the overall efficiency of company management. This is due to the fact that the stability of the company directly depends on its solvency.

Analysis and assessment of the solvency and liquidity of the company, carried out in a timely manner, reduces the internal costs of the company, as well as maintain flexibility in making management decisions. An effective system for analyzing and evaluating the solvency of an enterprise makes possible to increase the rate of increase in the sales of goods and services, as well as strengthen its place in the industry.

The high level of solvency contributes not only to the achievement of positive financial results from the functioning of the company, but also to their improvement in the coming period of time.

In the modern economy, enterprises need to form the most optimal system for analyzing and evaluating solvency, which allows determining the effectiveness of managing financial resources, company assets and its structure, as well as existing relationships with partners.

The market system of management significantly expands:

- the choice of alternative financial policy options;

- sources of financing activities;

- as well as possible objects for investing free cash assets of industrial enterprises [1].

At the same time, the risk factor in the activities of enterprises also increases.

Present characteristic features of the Kazakh economy are:

- the lack of working capital;

- low payment discipline;

- high cost of credit resources.

Effective financial management of enterprises in these conditions is of paramount importance.

Thus, the study, analysis and financial regulation of solvency and liquidity indicators for enterprises in the current period is very relevant, significant and important.

Currently, all subjects of market relations are interested in obtaining objective information about the financial condition of their business partners.

Solvency and liquidity are a signal indicator of financial condition. The ability to meet its obligations is the most important factor characterizing a company's financial position.

The most common indicator that quickly signals the financial well-being of an enterprise is its solvency, that is, the possibility of repaying its financial obligations in a specific period of time.

The most important signs of solvency are:

- availability of funds in bank accounts;

- no overdue debts;

- ability to cover current liabilities through the mobilization of working capital.

The main purpose of the analysis of the company's solvency is:

- timely detection and elimination of deficiencies in the financial activities of the company;

- search and determination of reserves to increase the overall solvency of the organization.

Solvency analysis is necessary not only for an enterprise to assess and forecast financial activities, but also for external investors (banks). A bank must verify the creditworthiness of the borrower before issuing a loan [2].

It is not necessary to deny that the solvency is definitely in indivisible dependence with the definition of liquidity.

Liquidity related:

- with the sufficiency of money;

- with the reliability of the performance of debt obligations.

In all cases, when there is a deal with the turnover of value, whether it be a turnover of goods or money, the liquidity problem arises at the final stage of the circuit.

Liquidity is the ability of the company:

- respond quickly to unexpected financial problems and opportunities;

- increase assets while sales increase;

- recover short-term debts by simply converting assets into cash.

Balance liquidity implies the ability of an enterprise to transform its assets into cash and pay current payment obligations.

A block diagram reflecting the relationship between solvency, liquidity of the enterprise and balance sheet liquidity is presented in figure 1.

Figure 1. The relationship between solvency, liquidity and balance sheet liquidity

This relationship can be compared with a multi-storey building, where all floors are equivalent, but the second floor can not be built without the first, and the third without the first and second.

Balance sheet liquidity is the basis (foundation) of solvency and liquidity of the enterprise. In other words, liquidity is a way to maintain solvency.

Company needs to have a sufficiently flexible capital structure, and be able to correctly carry out its movement in order to be considered solvent and liquid.

It follows from the above that solvency and liquidity can be achieved only with:

- sufficient amount of own funds;

- decent quality of company assets;

- the presence of permanent income from the organization;

- satisfactory level of profitability, taking into account financial and operational risks;

- sufficiently high degree of balance sheet liquidity;

- availability of wide opportunities for further attraction of borrowed capital [3].

Analysis and evaluation of the solvency and liquidity of the enterprise is particularly important in the overall management system, since its results are the basis and foundation for the use of certain management decisions aimed at obtaining maximum profit.

The method of assessing solvency by indicators requires consistent analytical steps and calculations. As a rule, a general analysis of an enterprise�s liquidity consists of two main stages:

1) the calculation of absolute indicators of liquidity;

2) calculation of relative liquidity indicators.

At the first stage, the grouping of all assets and the corresponding liabilities of the organization�s balance sheet is carried out to perform these calculations. Assets are grouped directly according to the degree of liquidity, that is, according to the time they are returned to cash and are divided into the following groups:

- A1 - the most liquid assets - short-term financial investments and funds of the organization;

- �2 - quickly sold assets - accounts receivable, payments for which are expected within 12 months after the reporting date;

- A3 - slow-moving assets (stocks, receivables), payments for which are expected more than 12 months from the date of the reporting date;

- A4 - illiquid assets (for example, it may be fixed assets, intangible assets).

In accordance with each group of assets, liabilities are formed according to the timing of the payment, in other words, according to the degree of urgency of their payment.

They are divided into the following four groups:

- P1 - the most urgent liabilities - accounts payable;

- P2 - short-term liabilities - short-term borrowed funds;

- P3 - long-term liabilities - long-term liabilities;

- P4 - stable (permanent) liabilities - articles of the section of the balance sheet liabilities �Capital and reserves�.

The organization is fully solvent, and the balance is considered absolutely liquid, subject to the following ratios of groups of assets and liabilities:

- A1 ≥ P1;

- A2 ≥ P2;

- A3 ≥ P3;

- A4 ≤ P4 [4].

Under these conditions, it is considered that the company has ideal balance sheet liquidity.

The second step in determining the solvency of a company is the calculation of relative liquidity indicators, that is, the analysis of solvency using financial ratios.

The main liquidity ratios presented in Figure 2 are calculated.

Figure 2. Liquidity ratios

Characteristics and standard values of the above indicators are formed in the general table 1.

Table 1. Relative liquidity ratios

Currently, a rather large percentage of domestic organizations are in a rather difficult economic and overall financial situation. Unsustainable global markets, changing regulatory conditions, and improving new financial products have made the management of liabilities and assets one of the most important tasks of enterprises.

According to some authors, the reasons for insolvency are:

- failure to comply with the plan for the production and sale of goods;

- increase production costs;

- failure to implement a profit plan;

- lack of own working capital of the organization.

If there is a period of payment of credit debts, and there is no money in the organization�s account due to the late receipt of payment for previously delivered goods, the company may become insolvent due to the financial lack of discipline of its own debtors.

In the decision-making process regarding financial sustainability, the management of an enterprise should remember the following:

- liquidity and solvency are the most important characteristics of the rhythm and stability of the current activities of the enterprise;

- any current operations immediately affect the level of solvency and liquidity;

- decisions, made in accordance with the selected policy for managing current assets and the sources of their coverage, directly affect the solvency.

The policy of managing current assets of an enterprise should pursue the main goal - ensuring a balance:

- between the costs of maintaining current assets in the amount, composition and structure, which guarantees against disruptions in the technological process;

- income from the smooth operation of the enterprise;

- losses associated with the risk of loss of liquidity;

- income from the involvement in the economic turnover of working capital [6].

Increasing the solvency and liquidity of a company can be made through integrated solutions aimed at improving the financial condition of the company and reducing debts. The main measures by which company can increase liquidity are:

- the maximum possible reduction in the value of receivables;

- increase profits;

- optimization of the capital structure of the enterprise;

- decrease in the value of tangible assets.

In order to carry out effective work, the management of companies needs to have an accurate and concrete understanding on the basis of which sources of funds they will function, and also to know in which areas of activity they will invest their own funds. As a key factor in the work of any organization, it is the task to provide the company with sufficient financial resources, that is, to ensure liquidity and solvency.

It is necessary to emphasize the factors that can directly affect the decrease in the solvency of the enterprise. These factors include:

- reduction of production volumes, as well as sales of goods and the company's work;

- increase in production costs and lower profit margins;

- lack of own funds, as sources of financing the work of the company, as well as a significant increase in debts;

- diversion of funds to receivables;

- increase in stocks exceeding the normative volume;

- insolvency of consumers of goods of the company.

Company can increase the rate of cash flow by:

- implementation of investment projects in order to reduce costs or increase output;

- introducing prepaid goods;

- reducing the time for granting loans for products;

- increase of discounts for cash payment for products,

- the lease of the share of fixed assets of enterprises, which in this period of time is not used;

- implementation of non-applicable equipment and mechanisms in the work of the enterprise.

Thus, the main reasons for the possible insolvency and illiquidity of the balance can be identified by increased receivables, lack of working capital, high dependence on borrowed funds. It is necessary to deal with the optimization of stocks and to observe a balance between the volume of inventory items in the warehouse and their turnover. Effective management of receivables consists in optimizing its total volume and ensuring the collection of cash on time.


1. Kupka P.R. Production and development. - M.: Lan-Trade, 2016.

2. Akinshin A.V. Innovative strategy of the company. - M.: Banks and stock exchanges, 2016.

3. Savitskaya G.V. Analysis of economic activities of enterprises. - M.: Ekoperspektiva, New Knowledge, 2016.

4. Sinitsin V.V. Effective modernization of production. - Management, 2016.

5. Panin D.A. Audit - Minsk: Profit LLC, 2016

6. Arbiev E.T. Practical marketing. - M.: Teis, 2016.

Table of contents: The Kazakh-American Free University Academic Journal №11 - 2019

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