Development and analysis of the budget funds On subject «Economy and Finance of the Enterprise»

 

Table 3.3 – The structure of liabilities of the forecast balance

Indicators	Beginning of qr.		End of qr.		Deviation
	ths. UAH	%	ths. UAH	%	ths. UAH	% at the beginning of qr.
1 Own funds	892,757	89,85	1252,108	91,77	359,351	96,92
1.1 Authorized fund	500,000	50,32	500,000	36,64	0	0
1.2 Retained earnings	392,757	39,53	752,108	55,13	359,351	96,92
2 Borrowed funds	100,821	10,15	112,238	8,23	11,417	3,08
2.1 Bank loans
2.2 Accounts payable for materials	36,181	3,64	39,918	2,92	3,737	1,01
2.3 Accounts payable for salaries	64,640	6,51	72,320	5,31	7,68	2,07
Balance	993,578	100,0	1364,347	100,0	370,769	100

 

Information that is given in the liabilities of the budget allow to defined: what changes have occurred in the structure of equity and debt, how many long- and short-term sources of funds were involved in the company’s turnover.

 

3.2 Financial ratios analysis.

Financial independence of the enterprise on external sources of financing is defined by the Equity Ratio, Кавт.

Кавт=   (3.1)

where СС – own funds;

В - total balance.

Total sum of debt shouldn`t exceed the amount of own sources of financing, critical value Кавт = 0,5. The higher this value, the more stable the financial situation (Less dependent to the external sources of financing).

So, in the beginning of quarter the equity ratio is following:

Кавт=892,757/993,578=0,90

In the end of the quarter:

Кавт=1252,108/1364,347=0.92

So, the financial situation is very stable.

To estimate the level of ensuring equity, the own funds ratio is used (3.2).

Ксс=(СК-НА)/ТА,  (3.2)

where СК - own and equated funds;

НА – non-negotiable assets;

ТА – current assets.

The value Ксс should be more than 0,1. But its value also depends on the brunch of activity.

At the beginning of the quarter:

Ксс=(892,757-650,7)/342,878=0,71

At the end of the quarter:

Ксс=(1252,108-704,400)/659,947=0,82

So, the company has high level of ensuring equity.

Under the solvency of the company understand its ability and willingness to repay short-term debt by funds that are available to the enterprise. They show the share of debts that can be paid by circulating assets. If all creditors at the same time require the repayment of debts of the enterprise, whether it is able to do this and at the same time keep all the conditions for the continuation of its activities. (Is connected only with the short-term debt).

Current solvency can be estimated by the positive value of working capital Рк (Working capital) and can be defined by the formula (5.3):

Рк=ТА-ТП,  (3.3)

where ТА, ТП – current assets and current liabilities correspondently.

So, at the beginning:

Рк=342,878-100,821=242,057

At the end:

Рк=659,947-112,238=547,709

Thus, working capital is financed by shareholders' equity and long-term liabilities.

Both surplus and shortage of own capital can be negative for the enterprise. The optimum size Рк is also depends on the brunch of activity, sales volume and other factors. In case of insufficiency of Рк, it is necessary to analyze each factors, that have influence on the solvency ratio (their absolute and relative changes), separately.

Own working capital - an important indicator of the financial condition of the company. Its size also affects some factors of financial stability and solvency of the company.

The quintessential condition is unique for each situation: which part of the circulating assets should be covered by own funds and which one – by borrowed funds.

The main feature of the company’s insolvency is the presence of non-payment. Violation of solvency may be indicated by operational information about delays in the payment of wages, payments to the budget, payment of settlement documents.

There are two ways of how to check the company's solvency:

- Inventory to Net working capital and Liquidity ratios);

- Cash flow method.

The coefficient of maneuverability in working capital depends on the policy of the enterprise. It shows the part of own funds, which is aimed on replenishment of working capital and which one – on accumulation. The normal value is more than 0,4-0,6. Maneuverability equity ratio, (Мк), defined by formula (3.4):

Мк =ТЗ*100/Рк,(3.4)

where ТЗ - inventories;

Рк - working capital.

The recommended value of the coefficient of maneuverability of equity depends on the specifics of the industry.

So, at the beginning of the quarter:

Мк =49,303*100/242,057=25,37

At the end:

Мк =76,311*100/547,709=13,93

Coefficients of liquidity

Liquidity – it is the ability to convert assets into cash without a substantial reduction in value.

There are three main types of liquidity

        - Current Ratio, Кп;

- Quick Ratio Кб.л.;

- Aside-Test Ratio Ка.л.

Current Ratio shows covering of current liabilities by the working capital that can be converted into cash in the near future. It (Кп) also shows, how many times the assets of the enterprise can be discounted, when they sold in case of bankruptcy.

  (3.5)

where ТА – current  assets;

ТП – current liabilities.

At the beginning of the quarter:

Кп=342,878/100,821=3,4

At the end:

Кп=659,947/112,238=5,88

Кп shows, how many monetary units of working capital accounts for each monetary unit of short-term liabilities. Critical situation when Кп is equal to 1. When Кп<1 the company has a non-liquid balance.  Кп is about 1- 1,5: the company can repay its debts. Recommended value Кп varies from 1,5 to3,0. It is connected with the chance of depreciation (reducing price) of assets of the company during their implementation

Most often, banks consider a sufficient condition for the loan value Кп more than 2.

If the funds can serve as a direct source of repayment of current liabilities, the reserves - only after their implementation, which still have to find a buyer. In the West, a highly liquid assets include not only cash, but also short-term securities, and net (ie cleared of bad debts) receivables.

Кб.л=(ТА-ТМЗ)/ТП,    (3.6)

where ТМЗ - inventories and costs.

So, at the beginning:

Кб.л=(342,878-49,303)/ 100,821=2,91

At the end:

Кб.л=(659,947-76,311)/ 112,238=5,2

For the quick ratio, the normal value is between 0,7-0,8.

In a crisis of non-payments in the Ukrainian economy, calculation of quick ratio should be accompanied by a detailed analysis of the customer's creditworthiness. if a significant portion of the receivable is overdue, it should be excluded from the amount of liquid. Stocks may be more liquid than receivables in case of the lack of poorly implemented material assets in inventory. Otherwise, the liquid assets should be taken into account in the amount reduced by the amount of hard realizable (poorly implemented) values. Assessment of overdue and uncollectible receivables is based on the debtors, their financial structure and solvency.

Aside-test Ratio shows which part of short-term debt may be covered by the most liquid current assets - cash and short-term investments.

Ка.л=ДС/ТП,  (3.7)

where ДС – cash and other short-term securities.

At the beginning:

Ка.л=81,174/100,821=0,81

At the end:

Ка.л=309,435/112,238=2,75

Indicators of the working capital efficiency

There exist 2 main indicators:

1. Current Assets Turnover (Ко);
2. Average Current Assets Collection Period (То).

Current Assets Turnover, Ко, calculated as the relation between gross income from sales (without VAT and excise) (f2) to the sum of working capital (f1).

Ко=ВД/ΔОС,    (3.8)

Where   ВД – gross income without VAT and excise;

ΔОС - average balances of current assets.

At the beginning:

Ко=384/342,878=1,12

At the end:

Ко=528/659,947=0,81

This indicator depends on the brunch of the enterprise’s activity and reflects the specific way of producing and selling. Due to the definition, it should be more than 1.

Average Current Assets Collection Period, То, is inversely proportional to the turnover ratio:

 

(3.9)

 

where D – is the number of days in the calendar period.

At the beginning:

То=90/1,12=80,35=81

At the end:

То=90/0,81=111,11=112

In the case of slowing down of turnover, it is necessary to estimate the stage, on which the freezing of circulating assets appears. The following coefficients should be calculated:

Receivables Turnover, Кодз, revenue from sales of products (without VAT and excise) divided by average balances of receivables (for the current period)

Кодз=ВД/ДЗ.    (3.10)

Beginning:

Кодз=384/212,40=1,81

Ending:

Кодз=528/274,20=1,92

Accounts receivable turnover period:

Тодз= D/ Кодз.   (3.11)

Beginning:

Тодз=90/1,81=49,72=50

Ending:

Тодз=90/1,92=46,88=47

These factors are complementing the previous ones. Accounts receivable turnover period can be calculated as cost of goods sold divided by the average for the period amount payable. It shows the quantity of turns, which required for the payment of existing debt.

If you compare the rates of payable to accounts figures, we can draw some important conclusions. For example, if the index of accounts payable turnover period exceeds the period of receivables turnover for at least a few days, it means the ability to keep the borrowed funds for longer. It is a positive development if it does not harm the relationship with business partners.

Profitability Ratios

The profitability of the company is characterized by a mass of profit and profitability.  The most commonly used in the financial analysis profitability ratios are:

- Return оn sales, ROS;

- Profit Margin;

- Return on Assets, ROA;

- Return on Equity, ROE.

The profitability of production is defined as the ratio of gross profit before tax to the cost of production.

Edge (margin) profit margin of the enterprise should be defined as the ratio of net income to gross income from sales of products without VAT.

Return on Assets, ROA, determined by dividing of net income by the average value of assets, for the analyzed period.

Return on Equity, ROE, can be found as the ratio of net profit to the average for the period of the cost of equity.

These margins should be compared with the rates prevailing in the industry for companies of about the same magnitude.

Table 3.4. Profitability ratios

	At the beg. of quarter	At the end of quarter
Profitability of production	384/217,828=1,76	528/299,513=1,76
Profit margin or ROS (net income/sales)	115,480/384=0,3007 or 30,07%	165,010/528=0,3125 or 31,25%
ROA (net income/total assets)	115,480/993,577=0,1162 or 11,62%	165,010/1364,347=0,1209 or 12,09%
ROE (net income/total equity)	115,480/892,757=0,1293 or 12,93%	165,010/1252,108=0,1317 or 13,17%

According to the results of calculations, it can be said that the profitability of production is enough high and there is very small change in those coefficients during the chosen period, so it is stable.

Table 3.5. The main financial-economic indexes and coefficients analysis.

Index	Normative value	Actual value
		Beginning qr.	End  qr.
1. Coverage coefficient, Кп	1,5-3	3,4	5,88
2. Absolute liquidity coefficient, Ка.л.	>0,2	0,81	2,75
3 Working capital, Рк	>0	242,057	547,709
4 Own funds ratio	>0,1-0,3	0,71	0,82
5 Coefficient of autonomy	>0,5	0,90	0,92
6 Turnover ratio of current assets	>0, increasing	1,12	0,81
7 Time of turnover of working capital, days	<365, decreasing	81	112
8 The turnover period of receivables, days		50	47

According to the table 3.5, it can be said, that coverage coefficient is increasing, that shows that the balance has high liquidity, but from the other hand, it’s more than 3, so in case of bankruptcy, assets of the company will go down in its value and write-down in their implementation. The value of absolute liquid coefficient more than normative, and during this period it increases, which shows that short-term debts can be covered by high liquidity assets, but in this case there is even no need in short-term debt. The own funds ratio increases and has positive value, so the company has solvency, which means its ability and willingness to repay short-term debt by funds that are available to the enterprise. Working capital is financed by shareholders' equity and long-term liabilities, and is increasing during the period. Coefficient of autonomy is more than 0.5 and is increasing, that represents high financial independence of the enterprise on external sources of financing. Turnover ratio of current assets is decreasing by the end of the quarter that indicates not efficient use by the company of its current assets to generate the revenue. The same situation show the time of turnover of working capital and the turnover period of receivables.

 

 

CONCLUSION

In the conclusion, as a result of all calculations and analyses, the enterprise is profitable, but also has some defects with turnover of current ratio and too high coverage coefficient. But, regarding the schedule of cash flow, as a result of calculation of the budget funds, the enterprise has prospective and well-established process of transferring and holding the balance of cash flow. The discrepancy between the amount of earned income and the amount of cash of the company explains by that the cash is distributed all the times through different costs and come through different receivable, it has very high liquidity, and after pointed out different stages resulted as earnings by the company. It is possible to ensure the excess of income over cash payments during the operating activities and it is stable during the chosen period. There is no necessity in the credit resources attraction, as production is profitable and all of the earning covers all the expenses.

Thus, the operative financial planning for companies monitors the actual receipt of funds on the current account, the expenditure flows from business activities, execution of the current financial plan.

The task of the enterprise planning, budgeting, monitoring its execution is one of the most important areas of management.

After the vertical and horizontal analysis of assets and liabilities, balance can be concluded that the balance completely liquid. Analysis of financial ratios shows that the company is profitable independent and solvent. The company has a low dependence on creditors. But it should also use its current assets more efficient.

 

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