Assets are slowly realizable: the solvency analysis methodology

In the process of analyzing the financial and economic performance of an enterprise, financial experts can pay a lot of attention to the company's assets being sold slowly. With what it can be connected? On this question you will find the answer in the article.

Why are slow-moving assets defined?

What are these assets of the enterprise?

Assets - slowly implemented or any other - are determined in most cases in the framework of the analysis of the economic activity of the enterprise. The main source of financial data in the case of the solution of the corresponding tasks is the balance sheet of the enterprise. It is formed on the basis of actual economic indicators of the firm, approved by its management and is considered as a key element of accounting.

Any current assets, slowly sold including, are analyzed, in particular, for the purposes of adequate assessment by stakeholders - first of all, the owners of the enterprise, the creditworthiness of the business. The structure of the firm's assets affects its ability to meet its obligations in a timely manner, including payments on loans.

Consider the importance of assets that are slowly realized in assessing the effectiveness of the business model of the enterprise. The following classification of the corresponding type of organization's resources will help us to study their specifics.

Classification of enterprise assets

In the environment of modern financiers, the approach is widespread, according to which the assets are classified into the following main categories:

• The most liquid (the so-called assets of group A1);
• Operatively implemented (A2);
• Slow assets (A3);
• Hard assets.

Let us consider their specifics, as well as the differences between them in more detail.

What are the assets of group A1?

To the relevant assets it is customary to include the funds available to the enterprise, as well as short-term investments. Both types of assets are reflected in separate lines of the balance sheet.

Assignment of these assets to the most realizable is understandable: the company's cash can be spent at any time in order to purchase something or pay dividends to business owners. They are characterized by absolute liquidity. In turn, short-term investments are assets that a firm can practically realize at any time to other business entities, and in some cases to private individuals. Therefore, they can also be rightly attributed to the most realizable resources.

Features of the assets of group A2

The next group of assets are those that are classified as operationally realizable. Traditionally, the receivables of the organization, which must be repaid within 12 months from the date of formation of the balance sheet or other source, which is used in the analysis of assets.

These resources are sufficiently highly liquid, however how quickly they can be implemented depends primarily on the terms of the contracts for which receivables arise, the conditions for the exchange of financial transactions between the parties to the transaction, and the solvency of the obligated party.

Assets of group A3

The next category of resources is just the same assets being sold slowly, or those belonging to the A3 group. Traditionally, these include inventories, as well as VAT, which is subject to reimbursement from the state.

The actual liquidity of the assets under consideration depends, first of all, on the dynamics of consumer demand for the products produced by the enterprise. At the same time, in its structure there can be present both very slowly sold assets and those that are represented by goods characterized by extremely high demand, therefore objectively subject to a higher level of liquidity - not A1, but quite possibly A2.

Thus, the considered type of assets makes sense to classify for additional reasons, and this will only increase the overall efficiency of the analysis of the enterprise's economic indicators.

Assets of group A3 as negotiable: what is their specificity?

It can be noted that the 3 categories of assets considered by us are traditionally classified as negotiable. They are characterized by a common feature - the ability to change their structure within a particular production cycle.

How quickly the current assets will be implemented is largely determined by the effectiveness of the company's marketing strategy. It happens that assets that are slowly realized within the same reporting period, quite dramatically change their relevance in the market. Such patterns can be cyclical - for example, if we are talking about seasonal goods or those that, from the point of view of determining the selling price, are strongly dependent on fluctuations in the exchange rate of the national currency.

Assets of group А4

Another group of assets that can be analyzed in the framework of the assessment of the effectiveness of the enterprise's economic development model are difficult to implement. These often include non-current assets, as well as receivables, which must be paid by the obligated party more than 12 months after the analysis of the company's economic indicators. Non-current assets include fixed assets and other resources that are acquired by the company for the organization of the production process.

Actually, the need to sell the assets in question arises, as a rule, during the liquidation or reorganization of an enterprise during a merger or acquisition.

So, we studied what resources like A3 are - slowly realizable assets, other values, classified using the criteria common to today's financiers. It will also be useful to consider how the relevant assets can be used in the analysis of the enterprise's economic activities in practice.

Assets in the analysis of economic indicators: nuances

Consideration of assets in the context of analyzing the indicators of the economic activity of the organization can be carried out only if they are compared with the indicators characterizing the value of certain liabilities of the firm. They can also be classified according to different criteria. So, there are liabilities:

• The most urgent (liabilities P1);
• Short-term (P2);
• Long-term (P3);
• Constants (A4).

The first includes those obligations that are desirable to be repaid within 3 months. To the second - liabilities, which need to be compensated for a period of 3 months to 1 year. Long-term liabilities assume repayment within a period that exceeds 1 year. Constant obligations are, in particular, the authorized capital of the enterprise, undistributed profits, incomes for future periods.

How, then, are the slowly realizable and other assets analyzed when compared with the amount of liabilities? Let's study this issue in more detail.

Assets and liabilities in the analysis of the balance: nuances

Among the financiers, the approach is widespread, according to which the balance of the organization is considered as fully liquid if:

• Assets of type A1 are greater than or equal to liabilities of type P1;
• Resources of type A2, in turn, correspond in size or exceed liabilities P2;
• There is no excess of slowly sold assets by long-term liabilities;
• Hard assets are less than or equal to constant liabilities.

In the event that the noted ratios are observed, the investor or any other interested person, such as a creditor, can highly appreciate the efficiency of the enterprise.

It can be noted that if at least the first three ratios are met, the fourth will also be fulfilled, and this will mean that the enterprise has enough working capital to obtain very high financial stability. In turn, if the first 3 ratios are not observed in the financial analysis of assets and liabilities, this may indicate that the management model of the firm is not very effective, and its balance sheet is characterized by low liquidity.

At the same time, the fact that, for example, slowly sold assets are in line with the balance sheet, it does not necessarily mean that the rest of the company's resources are sufficient. As a rule, in the course of the production process, one type of asset does not replace the other, unless it is, of course, a matter of cost compensation of resources.

Ratio of assets and liabilities: nuances

There are other formulas for assessing the effectiveness of the enterprise's production model.

So, it can be characterized as highly effective if the amount of liabilities P1 and P2 is less than assets A1. In turn, the solvency of the enterprise can be assessed as corresponding to a high level in the event that the amount of liabilities P1 and P2 is less than the sum of assets A1 and A2.

However, if the situation is reversed, that is, the sum formed when the indicators P1 and P2 are added is greater than that obtained when adding A1 and A2, but less than the sum of the indices A1, A2 and A3, the solvency can be characterized As acceptable in normal market conditions. In the event of a crisis, the firm may already have some problems with service obligations.

In turn, if the sum of indicators A1, A2 and A3 is less than that formed as a result of the addition of Liabilities P1 and P2, the business development model can be assessed as inefficient on the basis that the firm is more likely to experience service difficulties Arrears from assets.

Summary

So, we have considered what are the principles of classifying assets of an enterprise, and also what is the meaning of their analysis. Slowly realizable assets include, mainly, the company's inventories, VAT to deduction and other resources characterized by similar indicators of turnover. At the same time, it makes sense to carry out an additional classification of the relevant asset type because their liquidity can vary significantly, based on the specifics of the demand for a particular product. And it can depend, for example, on the seasonal factor.

When analyzing the efficiency of the production model of an enterprise, resources like A1, A2 and other current assets that are slowly realized among them, it makes sense to consider in the context of comparison with the size of the company's liabilities. In general, the excess of the first over the second will be welcomed. However, if this is the case, then it is assumed that the hard-to-recover assets belonging to type A4 will be less than the constant liabilities - those that are classified as liabilities P4.