Question "What is the liquidity of the enterprise" most often asked in context, but below the question is considered in a broader sense.
The market economy dictates its terms. Any entrepreneur wants to deal only with those companies that are able to pay off all their obligations within the agreed time frame. Therefore, it is important to understand what indicators financial condition businesses exist and what they stand for. One of these indicators is the liquidity or the ability of a particular enterprise to use the available current assets to quickly convert into money in order to pay off all creditors.
Definition of the concept of liquidity
Liquidity is the ability of material resources to quickly turn into money at a cost as close as possible to the market value.
Money in the economy has the most important feature - it is completely liquid, i.e. they can be used at any time as a means of payment. Roughly liquid material resource is quickly convertible into money.
The concept of liquidity can be applied to an enterprise, banks, securities, assets and liabilities. Depending on the time it takes to convert an asset into cash, there are several types of liquidity:
Let's understand what liquidity is on the real example : shares of a well-known gas company on the market can be sold in a couple of seconds, the difference in value compared to the purchased one will not be noticeable at all - only a couple of hundredths of a percent. And the shares of a little-known company will either be sold for much longer, or as a result, they will lose more than 10% of their market value.
Who needs liquidity and why
This is an important economic factor that potential investors first of all pay attention to when choosing a particular company in order to invest their capital in it. This will allow him to invest the funds as efficiently as possible, and if the option turns out to be a failure, he will always be able to promptly convert the company's asset back into money. People far from the investment process are interested in liquidity in order to understand which most reliable bank to give preference to.
The liquidity of an enterprise is analyzed in order to assess its real financial position in the short and medium term.
What does it mean? The specialist, on the basis of the balance sheet (namely, the forecasted results of activities) and the income statement, receives information about the presence of the enterprise on this moment sufficient amount working capital to pay off all liabilities.
Liquidity, profitability and solvency: debriefing
making out what is liquidity many people confuse it with solvency, believing that these concepts are identical. This is not entirely true. To determine liquidity, special coefficients are used that show whether there is enough working capital to pay off short-term obligations (even with small delays in payments).
The concept of solvency also means the presence of a sufficient amount of money or assets to pay off obligations, but short-term and long-term obligations. They call it solvent an enterprise that has no overdue debts to creditors and that has enough cash on its current account.
Conclusion: liquidity is the potential ability of the company to pay off short-term obligations, solvency is a real opportunity to fulfill obligations to creditors.
It is impossible to ignore the profitability, which serves as another indicator economic efficiency and is also related to liquidity. Profitability can be even with low liquidity.
For example, a small start-up moving company has two used cars and a small staff. The company received a loan for development. Liquidity in this case is low, after the sale of property, the money will hardly be enough to cover the debt. But the form can get a lot of daily revenue, so the business pays off and is cost-effective. Conversely, with low revenue, even an enterprise with high liquidity may soon go bankrupt.
Liquidity analysis. How and why to carry it out?
Through liquidity analysis, it is possible to judge financial stability company, how it “keeps afloat” and clearly see whether it can meet its obligations after the sale of existing assets and liabilities. Therefore, it is so important to analyze the financial condition of the enterprise.
This information is used by different users from the outside: 
- Suppliers of raw materials for the company are most interested in the indicator of absolute liquidity (what is the current total value of the company's assets that can be used to solve the problem of current debts);
- It is important for banks issuing a loan to an enterprise to know the intermediate liquidity ratio (the ratio of high liquidity assets to short-term liabilities or liabilities);
- It is important for investors and buyers of company shares financial stability, determined by the parameter of current or urgent liquidity (its ability to repay debts if difficulties arise with the process of selling products).
The main sign of good liquidity is an excess current assets enterprise over its short-term liabilities.
As you know, not every product can be quickly sold without losing its price. Some goods are sold quickly - they have a steady supply and demand, they are talked about - hot goods. And some will have to be sold for a long time, and you can’t do without discounts. The ability of a product to be quickly sold at a price close to the market is denoted by the economic term - liquidity. In everyday life, this term is used infrequently, but you may well hear it on radio and TV, or see it in the news or articles published in the paper press or on Internet sites. What does this term mean, where it is used, and in what cases it can be very important - we will figure it out in this article if possible in simple terms.
What is liquidity in simple words?
AT economic theory there is not one but several definitions of liquidity. We will consider what it is in simple words, using only the most basic examples. Most often, liquidity is understood as the opportunity without difficulty and in as soon as possible sell the asset at the market price.
An asset can be any tangible or intangible value. In the financial and business sphere, these are securities, cash deposits, real estate, enterprises, products, etc.
Liquidity (translated from the Latin liquidus - liquid, flowing) is economic term, denoting the ability of assets (values) to be quickly sold at a price close to the market. In other words, it is the ability of a commodity to be quickly converted into money.
Money, as a universal means of payment, has the greatest liquidity.
Another meaning of the term liquidity is the ability commercial organization, the state or any person to answer for its financial obligations. This ability is influenced by many factors, including economic situation in the country and the world, market conditions, the total value of the company's assets, etc.
For example, a bank will be liquid when, in the case of active lending to individuals and legal entities, he will have enough reserves to fulfill his obligations to return funds on deposits. And the liquidity of the state is determined by its ability to pay off debts to other countries in a timely manner, international organizations or banks.
Liquidity types
There are 3 types of liquidity:
- high;
- average;
- low.
High liquidity refers to those assets that can most easily be sold on the market. These include bank deposits and securities. With regard to enterprises and states, highly liquid are those that easily fulfill their financial obligations and make all payments in a timely manner.
Low liquid assets are real estate, businesses and marketable products. While shares can be sold in minutes, a house can take weeks or months to sell. In this case, the situation may be such that the property will have to be sold at a significant discount (discount). Illiquid organizations are those that are unable to repay the accumulated debts, the total value of their assets is lower than the existing debt.
The intermediate group includes, for example, metals, including precious ones. Their sale is usually not difficult, but it is not always possible to get a fair price for them.
But this classification is characterized by simplification and generalization. In fact, within each group of assets there are highly liquid instruments and illiquid assets. For example, among the shares there are so-called “blue chips”: Sberbank, Aeroflot, Gazprom, Lukoil, etc. These are the shares of the most successful companies for which the demand is very high.
On the other hand, there are many so-called "junk" papers on the market. These are stocks or bonds that are of no value to investors, and therefore it becomes a difficult task to sell them. The discount on them can reach 30-50%, and the implementation period can be calculated in weeks.
The situation is similar in the real estate market. Finding a buyer for luxury housing is very difficult, it can take many months or you will have to significantly reduce the price (this is low-liquid housing). At the same time, a modest one-room apartment can be sold in a matter of weeks. Therefore, such an asset in this group can be considered quite highly liquid.
Why is liquidity analysis important?
The liquidity indicator is considered very important in the economy. Its analysis allows you to assess the current state of the company, the value of its assets and the ability to fulfill its financial obligations. Liquidity is used by investors to assess the prospects for investing in a particular asset.
The most valuable are, of course, highly liquid assets. They allow the investor to quickly respond to changes in the market and quickly transfer one financial instrument to another. That is why the real estate market always keeps a good demand for affordable housing. And in the foreign exchange market, investors prefer to invest in the US dollar or euro, but avoid more exotic monetary units.
Also, a competent investor carefully analyzes the stock market, giving preference to those securities that can later be easily sold. Mistakes and risky actions can cost big money. By choosing low-liquid shares, an investor may find himself in a situation where no one will need them, even at a big discount. And in the event of a sharp drop in the quotes of these shares, he will have to record large losses.
As for enterprises, liquidity management has become an important task in any company. The tasks of financial analysts include:
- taking into account the financial resources of the company when determining the order of payment of invoices;
- prevention of cash gaps;
- determination of the minimum balance on the accounts, which will allow successful transactions the next day.
Competently organized work in the company ensures a clear interaction of various structural divisions, which makes it possible to effectively use financial resources and avoid problems with payments. In such a company, management has a complete picture of the financial situation, controls all financial flows and can predict the state of the enterprise in the short and medium term. And in the analysis of the situation, liquidity plays an important role.
The liquidity of money - the ability at any moment or within a certain period of time to turn money into any kind of goods or services that the owner of money needs, is their natural property as a means of circulation and means of payment. Liquidity determines opportunity monetary circulation, i.e. the movement of money in society and the economy as a means of paying private and public debts. This includes not only the circulation of commodities, but also the movement work force and capital. Unfortunately, monetarist theories narrow the problems of money circulation to the maintenance of commodity circulation. With this approach, the central problem of monetary regulation becomes the question of the amount of money needed for circulation.
The economic tradition, starting from W. Petty and K. Marx and ending with modern economists, adheres to the quantity theory of money required for circulation. With all the discrepancies in the theoretical explanation of the ratios and content of individual quantities, the content of this theory is the same, changing mainly depending on changes in the monetary material - from precious metals to credit money. For the first time, the regular amount of money in circulation in the form of a simple formula was defined by Karl Marx as follows:
"... for the process of access for a given period of time:
The number of turnovers of any working capital, including goods in monetary form, is determined by the formula
n = c / S, (2.2)
where n is the number of turnovers of working capital for certain period time; c - the volume of sales of goods (equal to the sum of the prices of goods); S - the average amount of working capital.
We represent the formula in the form
M = s / n, (2.3)
where M is the mass of money functioning as a medium of circulation.
From a comparison of the above formulas, we obtain that M = c / n = S, i.e. "the mass of money in circulation" is equivalent to the average for the period of the balance of working capital serving a given volume of sales of goods.
However, this position is not entirely true. Let us assume that we consider the working capital of the country, serving the general commodity turnover. It is obvious that the working capital cannot be all present in the form of money at the same time. Part of this capital must be presented in the form of goods at the stage of production, preparation of goods for shipment, in transit, in trading network etc.
Reasoning about the speed of money turnover based on the equality C=M or M=C in each individual commodity transaction does not stand up to criticism from the standpoint of reality, because the money supply is primarily a part of the country's working capital, and the needs for the sale of goods in money are determined by the size and speed of the sale of public goods. product, as well as generally accepted forms of settlements and payments.
When analyzing this issue, it is extremely important to note that in reality cash, which are in the national economic circulation, break up into three streams, which at times merge again:
The first flow is the funds used to purchase goods by some participants in the economic process from others. This is money flowing from buyers to sellers - suppliers of raw materials, materials, equipment, etc. In other words, the cash flow from the sale of the final product to enterprises that extract raw materials. Its value is indeed determined depending on the prices and volumes of purchased products.
At the same time, at each stage of the production process and the sale of products, part of the money goes out of the process commodity circulation and forms the monetary income of the population. The latter have their own cycle and patterns of circulation. The main feature of the movement of money in this flow is that the timing and frequency of receipt of income do not coincide with the speed of spending money on the purchase of goods and services. In fact, it is necessary to distinguish not one, but at least two rates of money turnover:
- when paying income;
- when spending income on the purchase of goods, i.e. as a means of servicing commodity circulation.
In the third stream, part of the funds is saved by participants economic processes and then invested in the further development of production in the form of capital.
Money is the universal equivalent of value. Money- a special commodity that performs the role of a universal equivalent in the exchange of goods. Money is an absolutely liquid medium of exchange. liquidity- the ability of any financial asset to turn into cash. The degree of liquidity of assets is determined by how quickly and at what cost (compared to their monetary value) these assets can be sold. Absolute liquidity government-issued cash. highly liquid Treasury bills, short-term government securities, are considered. This is because the market prices of these securities change only slightly from day to day, and also because they can be easily sold on the financial markets (because they are highly reliable), and the transaction costs will be very low. Intermediate or medium level of liquidity equities and long-term bonds issued by private corporations are possessed, since the prices of these assets change much more over time and the fees charged for transactions with such securities are much higher. Illiquid real estate (houses, industrial buildings), as market price on it is very volatile, it is difficult to predict before the transaction. The costs of such transactions can be very high.
The essence of money is manifested in their functions: measures of value, means of circulation, means of payment, means of accumulation, world money. Money as a measure of value mean that they measure the value and price of goods. Money measures the value of commodities, i.e., the commodity is equated with a certain amount of money, which gives a quantitative expression of the value of the commodity. Price - the value of a thing, expressed in money. The state uses a certain monetary unit (ruble, dollar) as a scale for measuring value. Also, weight is measured using units of weight (grams, kilograms, etc.), the cost of goods has a monetary value. Because of this, we can measure the value of economic goods.
Money as a medium of exchange involved in the sale and purchase of goods and services. In this case, money acts as a fleeting intermediary. The use of money as a medium of exchange reduces the costs of circulation by reducing the effort and time to complete the purchase and sale. This function of money explains the appearance in circulation of defective coins (coins, the content of gold and silver in which is less than the face value, i.e., the weight indicated on the coin), as well as paper money.
Money as a means of payment act in the payment of wages, taxes, insurance payments, the sale of goods on credit, and in many other cases when the movement of money is not mediated by the movement of goods. If a commodity is sold on credit, then the medium of circulation is not the money itself, but debt obligations expressed in money. As the industrial society develops, the means of payment increasingly replaces the medium of exchange, the sale and purchase on credit become the most common. The fulfillment of this function by money led to the emergence of credit money: bills of exchange and bank notes.
Money as a store of value do not participate in turnover and act as a financial asset. Money is a convenient form of storing wealth. Here, money acts as a special asset that is retained after the sale of goods and provides its owner with purchasing power in the future. True, keeping money, unlike owning stocks, bonds, savings accounts, does not bring additional income. However, the advantage of money is that it can immediately be used as a medium of exchange or means of payment.
Function world money is performed on the world market when servicing the movement of goods and services, capital and labor. World money is the same as national money, only at the international level. The currencies of the leading countries (dollar, pound sterling), as well as money created as a result of collective agreements (euro) act as world money.
Liquidity
Absolute liquidity
Absolute liquidity ratio(English) cash ratio) - financial ratio, equal to the ratio of cash and short-term financial investments to short-term liabilities (current liabilities). The data source is the company's balance sheet in the same way as for current liquidity, but only cash and cash equivalents are taken into account as assets: (line 260 + line 250) / (line 690-650 - 640).
Kal = (Cash + short-term financial investments) / Current responsibility Kal \u003d (Cash + short-term financial investments) / (Short-term liabilities - Deferred income - Reserves for future expenses)It is believed that the normal value of the coefficient should be at least 0.2, i.e. every day, 20% of urgent obligations can potentially be paid. It shows what part of the short-term debt the company can repay in the near future.
Market liquidity
The market is considered highly liquid, if it regularly concludes in sufficient quantities purchase and sale transactions of goods circulating in this market and the difference in the prices of applications for purchase (demand price) and sale (offer price) is small. Each individual transaction in such a market is usually not able to have a significant impact on the price of goods.
Liquidity of securities
The liquidity of the stock market is usually estimated by the number of transactions (trading volume) and the spread - the difference between maximum prices buy orders and minimum prices of sell orders (they can be seen in the glass of the trading terminal). The more deals and the smaller the difference, the greater the liquidity.
There are two main principles of transactions:
- quotation- placing own orders for the purchase or sale, indicating the desired price.
- market- placing orders for instant execution at current bid or offer prices (satisfaction quotation bids with the best current price)
Quoted bids form instant liquidity market, allowing other bidders to buy or sell a certain amount of an asset at any time. The question will be in the price at which the transaction can be carried out. The more quotation orders placed for a traded asset, the higher its instant liquidity.
Market orders form trading liquidity market, allowing other bidders to buy or sell a certain amount of an asset at a desired price. The question will be in the time when the transaction takes place. The more market orders per instrument, the higher its trading liquidity.
see also
Notes
Literature
- Brigham Y., Erhardt M. Analysis financial reporting // Financial management= financial management. Theory and Practice / Per. from English. under. ed. Ph.D. E. A. Dorofeeva .. - 10th ed. - St. Petersburg. : Peter, 2007. - S. 121-122. - 960 p. - ISBN 5-94723-537-4
Categories:
- Financial ratios
- The financial analysis
- Economic terms
- Money turnover
- Investments
- Exchanges
- Corporate Governance
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