The stability of the financial position and sustainable development of the company largely depend on its business activity. It can be assessed by quantitative and qualitative criteria.
Quantitative assessments of the business activity of the enterprise
In a financial sense, the company's business activity is manifested in the turnover of its funds. In this regard, when analyzing business activity and business efficiency, the dynamics of turnover indicators (ratios) is used. There are a number of reasons for their importance to the enterprise. First, the size of the company's revenue depends on the rate of turnover. Secondly, the relative value of fixed costs depends on the size of the turnover - the higher the revenue, the lower the share of costs. Thirdly, an increase in turnover at one stage leads to its acceleration at another. In general, the company's solvency and profitability directly depend on how quickly investments in assets turn into real money.
There is a whole range of turnover ratios. Among them are the ratios of assets and equity turnover, fixed assets and inventories, accounts receivable and payable.
The asset (capital) turnover ratio denotes the rate of turnover of the enterprise's capital or how much money each unit of assets brought. It is calculated as the ratio of net proceeds to the average asset value (capital value).
The ratio of the turnover of working capital shows the ratio of proceeds to the working capital of the enterprise. If this indicator decreases, then this signals a slowdown in the circulation of money.
The receivables turnover ratio is estimated as the ratio of proceeds to the average amount of debt. It reflects how many times the funds invested in settlements with consumers turned around. A high value of the indicator indicates that the company quickly received payment on the bills.
The turnover on accounts receivable should be compared with the same - on accounts payable. The latter ratio reflects the expansion (decline) of commercial loans that were provided to the company. Its growth means that the speed of payment for purchases by an enterprise is growing, while a decrease indicates an increase in purchases on credit.
The turnover ratio of inventories reflects the number of turnover of the company's inventories. Its decline indicates an increase in work in progress or a drop in demand for products. The higher the inventory turnover rate, the more stable the financial position of the enterprise.
It is calculated as the ratio of the cost of production to the amount of inventory.
Fixed assets turnover ratio is also called capital productivity. It displays the ratio of net proceeds to the value of fixed assets. Based on this ratio, one can judge the efficiency of the use of fixed assets.
A quantitative assessment of business activity can include an analysis of not only relative, but also absolute indicators. The latter include, in particular, the volume of capital, products sold and profits, as well as their dynamics.
Qualitative assessment of the business activity of the enterprise
Assessment of business activity by qualitative criteria involves the use of non-formalized indicators. These include the sales market (volume and growth rates), the export potential of products, financial activities, and the labor market. They include the reputation of the company, the number of regular customers, the level of fame.
An increase in the company's business activity may manifest itself in the expansion of the geography of sales, the assortment of goods, the professional development of the company's employees, and the efficiency of using the raw material base. Business growth activities usually require significant capital expenditures that only pay off in the long term. They include, for example, reorganization and expansion of production, overhaul, expansion of the product range.
