Analysis of the financial stability of the enterprise

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

There are quite a lot of enterprises in the world that produce various products and goods or offer their services. How do they stay afloat? How can entrepreneurs promote and grow their organizations? To do this, there is such a thing as an analysis of the financial stability of an enterprise.

What is financial sustainability?

Financial stability characterizes an organization in its financial terms, because the result of absolutely any organization depends on the presence of a certain amount of finance in it and their correct distribution. Specifically, sustainability means financial stability, the ability (or inability) to provide the enterprise with a sufficient amount of finance and other necessary resources. It also denotes the efficiency of the use of funds, the functioning and communication with other financial enterprises, and the very stability and reliability of the company.

Modifying the above definitions, we can expand the definition of financial stability,emphasizing similar features of the enterprise, which testify to its stability. Thus, a financially sustainable enterprise will operate in accordance with its goals.

Firms constantly face various challenges and consequences that make it difficult to understand whether a given organization is achieving its goals.

The impact of this uncertainty on business models is called risk. It manages risk through identification, analysis and evaluation with the aim of changing it by implementing disposal procedures. Accountants and analysts, working together and taking into account data from loss reports, can prevent such moments of crisis as, for example, bankruptcy.

Depending on their condition, financial stability is divided into types:

• Absolute. If the company has enough cash to continue working, while it is independent of debts and creditors, then it can be called absolutely financially stable.
• Sustainable. Provides the enterprise with the necessary funds and resources, is in a state of relative stability.
• Unsteady. Inability to pay financial bills on time, to provide the organization with the necessary funds and resources to function.
• Crisis. Simply put, this is a condition that is also called bankruptcy. It means a complete loss of the ability to maintain the financial condition of the enterprise and continue business activities.

To determine the level of the state of the organization, eachan entrepreneur needs to know how to do this. An analysis of the financial stability of the organization helps to determine this. It is managed by management, whose task is to ensure stable sustainability. He also analyzes the entire work of the enterprise. Usually research goes in the following directions:

• analysis of profit indicators in full;
• study of profitability indicators;
• analysis specifically of financial stability and stability in the sales market;
• research on the efficiency of the use of capital and the product or service being sold.

A business analyst analyzes all these criteria. His task is to determine, study the state of the company, predict and develop new business models. The main function of the analysis of the financial stability of the enterprise is to eliminate shortcomings so that they do not lead to a crisis. This goal is the main one, because the future and reputation of the organization, as well as its work and functioning depend on it.

Financial stability, in turn, guarantees the high productivity of the company and the fulfillment of planned tasks. A normally functioning enterprise can be called one that can independently pay for its financial needs and perform the services offered.

Preliminary stability analysis

Before performing analytical work, it is necessary to give a preliminary assessment of the current state of the company in order to avoidsubsequent analysis problems. For this you need:

• assess the current situation, including property;
• discuss the conditions under which the enterprise operates;
• make an analysis of the results already achieved;
• to develop new goals, analyze the prospects of the organization.

This method of analyzing financial stability is extremely important for every enterprise, they can also be indicated in regular accounting reports. Each of them should show the full effectiveness and prospects of the organization's work. However, such reports may also include a loss item if the company's productivity has declined and the financial situation has suffered. In such cases, the company begins to conduct various analyzes in its work and eliminate the “problems” that have arisen.

Determination of economic potential

The economic potential of each organization can be viewed from two sides: property and financial. They are invariably linked, because the deterioration of the property potential leads to a decrease in the financial one, and vice versa.

In the process of the functioning of the enterprise, it is very important to correctly allocate assets, because the future financial condition depends on their investment. To do this, some categories of analysis are reappearing in the world of entrepreneurs - vertical and horizontal.

Vertical analysis exists to characterize the structure and sources of enterprise funds. It is also used to evaluateinfluence of inflation and conduct regular comparisons of your company with competitors' organizations, plan to receive investments in the future, work on the company's reputation for investors and potential buyers.

Horizontal analysis is aimed only at working with analytics, it is used to compile analytical tables. They usually indicate the growth rate in a certain period, which helps not only to analyze the actions of organizations, but also to make forecasts of their development.

In addition, there is such a thing as trend analysis. It allows you to compare each reporting position with the positions of a number of previous periods and freely determine the future of the company. Factor analysis evaluates the factors (positive and negative) that affect the development of the organization.

These tests are interrelated and have similar benefits. Their interaction is extremely useful for comparing the actions of the company, determining its state. They can effectively determine the current position of the company, taking into account the main indicators of the analysis of the financial stability of the enterprise.

Criteria and indicators

There are really a lot of such indicators, which allows analysts to evaluate the actions and performance of the company from different angles. The data of these indicators can be called the analysis of financial stability ratios. The following coefficients are distinguished:

• Organization autonomy. That is, the ratio of the equity capital of the organization to the total amount of capital. It is also called the coefficientindependence.
• Cap ratio. It characterizes the amount of the creditor's contribution and the company's own income, their interactions and mutually beneficial models.
• Asset coverage ratio. This is a definition of the possibility of paying debts and loans at the expense of existing assets. This ratio calculates exactly what part of the assets will go to pay debts. It is also used to analyze liquidity and financial stability.
• Investment coverage ratio. Shows how the company operates through regular investment.

To create an example of financial stability analysis, it is necessary to use detailed tables and charts, which will necessarily include the following changes:

• total value of property;
• non-current or current assets;
• value of intangible assets, fixed assets, financial investments;
• value of inventories and receivables;
• some short-term financial investments, as well as an analysis of existing assets and other funds.

Analysis of financial statements

This analysis provides the main source of information about the financial system. On its basis, mandatory compilation of business models, forecasting and evaluation of all important indicators are carried out. The structure of companies is formed taking into account all accounting reports, including an analysis of financial stability.

The main advantage of doing accountingaccounting, it is considered that the data contained in the report, as a rule, are relatively reliable. The analysis of records is always carried out according to special accounting principles, so all information has a fairly high degree of reliability, but some shortcomings are still allowed. This allows companies to accurately predict their future actions without serious risks and conduct analyzes of the solvency and financial stability of the enterprise.

However, for the complete reliability of such reports, it is necessary to take several actions: verify (officially confirm) financial (accounting) statements and regularly make adjustments to the information. Only then will all calculations be truly correct.

Types of financial analyzes

Analysis of the financial stability of an organization is divided into two types: external and internal.

Internal analysis is carried out, as a rule, by the internal bodies of the enterprise. Its results are usually used to control the financial situation in the company, predict future development, and so on. The purpose of such an analysis is the correct and stable flow of funds to the budget of the organization. After all, financial resources are extremely important for running any business.

External analysis is carried out by investors, auditors, suppliers of various types of resources, as well as various control bodies through public reporting. Both internal and external analysis have a significant impact on the organization's performance.

A feature of these reports, according toThe data of the exchange rate analysis of financial stability is that each of them together and separately represents for attention a certain picture of the state of the organization, its finances, as well as the general state of affairs.

Methods of financial analysis

Techniques and methods by which business analysts classify indicators of financial stability analysis can be divided into the following categories:

• The degree of formalization. It, in turn, is divided into formalized methods and non-formalized ones. The former have been and are the main methods when it comes to financial sustainability. Non-formalized ones are based on the opinions of experts, workers and analysts and simply describe some analytical techniques.
• Degree of instrumentation. That is, economic, mathematical methods of keeping statistics and optimal programming, which are also divided into many subgroups.

The author of a coursework about the analysis of the financial stability of an enterprise must necessarily indicate that for a complete description it is not enough to have knowledge of only some methods of this analysis. It is important for an entrepreneur to have qualified personnel who can make new developments and implement them. In addition, it is necessary to provide the company with modern computer technologies.

Financial sustainability in general

A well-conducted analysis of the financial and economic aspects of the functioning of the enterprise helps to evaluate the work performed and correctly predict changes in order toget the most profit. For this, they conduct an analysis of the assessment of financial stability, which is why it is the main priority for every entrepreneur.

The financial resources owned by each company must comply with the rules of the market. They also show the need or lack thereof for each business.

External factors of influence

The functioning of an enterprise largely depends on the quality of the product or services provided, as well as on the service, the timeliness of its work and the total capital of the organization. All these mandatory items must carry certain information about their actions, that is, be justified in some way. To do this, there are many analyzes that allow you to determine the effectiveness and significance, as well as make forecasts for the future of the organization and provide customers with a good product.

With a qualitative analysis of financial stability indicators, an enterprise will be able to be competitive in the product market. However, there are many external factors that directly affect the financial stability of organizations. They can be:

• Economy in the country. Any enterprise, even privatized, will depend on the economic state of the country. When the economy falls, risks such as low liquidity and solvency are possible, and in extreme cases, bankruptcy may not be avoided.
• Competitiveness. This concept has always been popular among entrepreneurs: if your product is competitive,This means that the organization is worth attention. However, one must always fight, push one's product or service forward and maintain the potential of the organization. It may also be affected by insufficient quality of the product, so customers will give preference to stronger entrepreneurs.
• Macroeconomics in the country. In addition to the strong influence of the economy, macroeconomics is also worth considering. Changes in the exchange rate, the impact of foreign economic relations in the country - all this will affect the state of the enterprise.
• Inflation. In addition to the influence of the currency, inflation is of great importance. It greatly destabilizes the state of the organization, including financial.
• Politics. Doing business is also directly affected by the political situation in the country. Any laws or reforms may affect the operation of the enterprise in the future. Or consumer protection rights will come into force, which can also greatly undermine the company's reputation.

One or more of the above factors could very well be the end of a business. To prevent this from happening, there are analyzes of the stability of both the financial condition of the company and its competitors.

Conclusions

Finance has always been a guarantee of quality goods, the definition of profitable contracts and transactions, the characteristics of all organizations and enterprises.

Each company conducts many analyzes every day, draws up business development models, determines the prospects for the future, comes up with plans based on the analyzes carried outsolvency and financial stability.

Thus, financial stability is one of the main characteristics of any business entity. It allows you to determine the competitiveness of the enterprise, its current and potential stability and reliability. All this helps to choose the right development strategy in advance.

However, the costs that are shared across all tests are sometimes extremely high. Indeed, their cost also includes the remuneration of employees, hired specialists and business analysts, whose work in the modern market is highly valued.

This is how complex any venture can be. If the organization works correctly, then at the end it provides customers with a high-quality and unique product. Customers, in turn, improve the company's reputation by leaving positive feedback about it, and they are able to attract other consumers.