The liquidity of an enterprise is one of the manifestations of its financial stability. It refers to the company's ability to meet its obligations in a timely manner. A liquid company is a company that is able to fulfill its short-term obligations by selling current assets.
Instructions
Step 1
The liquidity of the company is determined on the basis of relative indicators. The absolute liquidity ratio reflects the firm's ability to fulfill its short-term obligations through the sale of cash and short-term financial investments. This ratio shows what proportion of current liabilities can be repaid in the shortest possible time. The main factor that increases the absolute liquidity is the timely and even repayment of receivables.
Step 2
The quick ratio characterizes the company's ability to cover current liabilities by fully repaying receivables. In this case, production inventories are excluded from the calculation as the least liquid part of current assets. If the growth of this ratio is associated with an increase in overdue accounts receivable, then this is not a positive aspect of the enterprise. To increase quick liquidity, it is necessary to promote an increase in the provision of stocks with its own working capital. This is possible by building up its own working capital and reducing the level of inventories.
Step 3
The current liquidity ratio shows the ability to calculate on current liabilities subject to the repayment of short-term accounts payable and the sale of current reserves. To increase this ratio, it is necessary to increase the company's equity capital and restrain the growth of non-current assets and long-term receivables.
Step 4
Ways to increase liquidity and solvency at the enterprise will depend on the factors that caused their decline. External reasons include a decline in production in the country, bankruptcy of debtors, outdated technologies, imperfect legislation, etc. To reduce the impact of these factors, the company may issue new shares to raise funds.
Step 5
Internal factors of decreasing liquidity include a shortage of own working capital, an increase in accounts receivable and payable, imperfect pricing mechanism, and low contractual discipline. In this case, the company needs to pay off the receivables on time. This can be achieved by conducting factoring operations or concluding an assignment agreement, i.e. assignment of claims and transfer of ownership. In addition, it is necessary to improve contractual work and tighten contractual requirements.
