Development of a Method of Analysis of the Financial Condition of the Enterprise Taking into Account the Life Cycle and Features of Its Functioning

Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 890-893

J. Environ. Treat. Tech.

ISSN: 2309-1185

Journal web link: http://www.jett.dormaj.com

Development of a Method of Analysis of the

Financial Condition of the Enterprise Taking into

Account the Life Cycle and Features of Its

Functioning

Anton N. Karamyshev , Gulsina K. Gabdullina , Anatoly Ye. Yakovlev

Kazan Federal University, Naberezhnye Chelny Institute, Naberezhnye Chelny, Russia

Kazan National Research Technical University named after A.N.Tupolev-KAI, Naberezhnye Chelny branch, Naberezhnye

Chelny, Russia

Received: 13/09/2019

Accepted: 22/11/2019

Published: 20/12/2019

Abstract

A disadvantage of the traditional methodology for analyzing the financial condition of an enterprise is the lack of theoretical and

methodological developments adapted to Russian business conditions that allow differentiating the subject of research depending on

industry and regional affiliation, as well as the stage of the life cycle and the scale of functioning of corporate structures. Ignoring the

regional and sectoral affiliation, the stage of the life cycle and the scale of the enterprise’s activity in a comparative analysis of the

actual and normative values of the financial condition indicators does not make it possible to formulate the correct conclusion about

the degree of financial stability of the enterprise. It is too early to draw any conclusions regarding the financial condition of the

enterprise at an early stage of its life cycle, which is explained by the work of the enterprise not at full capacity. The company, at the

stage of its birth, is still unstable, since it has a significant share of borrowed capital, risk indicators are high, and solvency ratios do

not reach the recommended values, which contradicts the concept of “sustainability”. At the same time, if the idea of implementing

the business of this enterprise is successful, then at the next stages the investment will pay off and bring the expected profit. An

important factor in the analysis of the financial condition of the enterprise is also its industry and scale. Neglect of these factors leads

to a distortion of the assessment of the level of the financial condition of the enterprise.

Keywords: Analysis, Financial condition, Development, Specific features, Enterprise management

Autonomy coefficient> = 0.5 (or 50%);

Coefficient of provision with own circulating assets

Introduction

Analysis of the financial condition of the enterprise is

≥

0.1 (or 10%) (6, 17).

The analysis of the presented coefficients when

carried out using a group of indicators characterizing its

solvency and financial stability. Realizing the research

potential in this direction, the groups of indicators used by

modern analysts to assess the level of solvency and financial

stability of the enterprise have been identified. These are

indicators: solvency and liquidity; financial stability; business

activity and profitability (2, 7, 22).

comparing them with the recommended values does not make

it possible to formulate the correct conclusion about the level

of financial stability of the analyzed enterprise, as a result of

ignoring the stage of the life cycle, scale, industry and

regional affiliation of the enterprise (8, 9).

Moreover, the principle of forming the assets of the

enterprise is ignored, namely financing non-current assets at

the expense of equity and long-term liabilities, and

circulating at the expense of equity and short-term liabilities,

as a result of which the calculated values of the financial

condition do not correspond to the recommended ones and

give them an incorrect assessment (10, 11, 12, 20, 21).

As is known in relation to some indicators, the practice of

constructing forecast balances has made it possible to

establish regulatory values and restrictions that satisfy the

requirements of solvency and financial stability.

An absolute liquidity ratio ≥0.2 (or 20%) (5);

Current liquidity ratio from 1 (or 100%) (5);

Text of Article

Currently, for all enterprises, regardless of the

Corresponding Author: Anton N. Karamyshev, Kazan

Federal University. E-mail: antonkar2005@yandex.ru.

Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 890-893

characteristics of their activities, a standard set of normative

values characterizing their financial condition is used.

However, from the point of view of the authors, each

enterprise should independently develop its own standards for

assessing the level of financial condition, depending on the

characteristics of its financial and economic activities and

environmental conditions. When developing a system of

normative indicators, it is necessary to take into account the

stage of the life cycle, the specifics and scale of the

enterprise.

Undoubtedly, the stage of the life cycle plays a

significant role in the analysis of the financial condition of an

enterprise. At the stage of its inception (formation), the

enterprise cannot do without borrowing funds. When

improving the quality of products in order to ensure the

transition from extensive-intensive to intensive type of

production development.

The enterprise growth stage is characterized by the

following features: a sharp increase in the rate of sales of

products and services, recognition of the enterprise by

consumers, suppliers and creditors, improvement of

production, cost reduction, stabilization of distribution

channels. Production is characterized by intensive

modernization; the quality of products is growing. The share

of borrowed capital in the sources of formation of the

enterprise is noticeably reduced, and the actual values of

indicators of financial stability and solvency are stabilizing.

Otherwise, we can say that the company lags behind the level

of financial and economic stability, which is characteristic of

the stages of development in the past. In this regard, it is

necessary to revise the loan policy and marketing strategy of

the enterprise.

analyzing

a loan application, financial organizations,

including banks, make a decision on its issuance on the basis

of the results of the analysis of the creditworthiness of the

enterprise, the essence of which is that the actual values of

solvency and financial stability are recommended.

At this stage, an important role is given to indicators of

asset turnover and return on sales, the dynamics of the values

of which determine the nature and content of adjustments to

the enterprise development program. The absolute load of the

enterprise’s production capacities and the use of available

resources (material, labor, financial) indicates the onset of the

maturity stage. An enterprise that successfully uses the

potential of the external environment, while maintaining the

conditions of competition, while the main attention of the

enterprise management is focused on environmental factors

in the direction of reducing costs and product prices, the

incentive system for repeated or repeated purchases of goods

and the development of a service. At this stage, maintaining

the financial stability of the enterprise is accompanied by

control over the dynamics of the value of the efficiency

indicators of the use of all resources (profitability of sales,

assets, net worth, turnover of resources, production, etc.).

High values of indicators characterizing production and

financial risks, outstripping the use of extensive factors in the

development of production can lead to deviations of financial

indicators from their industry average values. This, in turn,

speaks of the financial instability of the enterprise at the

maturity stage and necessitates the development and

implementation of a crisis management program. The above

determines the need to take into account the stage of the life

cycle of an enterprise when:

However, as a result of ignoring the life cycle stage when

developing recommended values for financial indicators,

many enterprises have an unsatisfactory assessment of their

creditworthiness and are denied credit. As a result of this,

many enterprises, having not had time to start their activities,

are forced to curtail it. Therefore, the differentiation of the

recommended values of the traditionally used indicators of

the financial condition of the enterprise relative to the stage

of its life cycle seems to be correct. This is determined by the

natural changes that occur in the internal environment of the

enterprise, namely, in the structure of its assets and liabilities,

the condition and efficiency of use of available resources, the

level of business activity and competitiveness, etc., starting

from the stage of origin (formation), ending it aging and

elimination. In this regard, for effective financial

management it is necessary to develop individual

recommended values for the performance of an enterprise

located at a particular stage of the life cycle.

For example, the stage of origin (formation) is

characterized by the formation of the enterprise and its

gradual introduction into the market, its technical and

economic formation and build-up of assets. At this stage, an

important condition is tracking and comparing the actual

forecast and planned indicators of the enterprise, with

particular attention to the dynamics of the structure of assets.

The utilization of the enterprise’s production capacities at

this stage is not one hundred percent, as a result of which it is

erroneous to formulate conclusions about the level of its

financial condition. At the initial stage, the enterprise is

characterized by: high risk indicators, a significant share of

borrowed funds and unsatisfactory solvency ratios, and if the

business is successful and profitable in the future, this will

ensure the financial stability of the enterprise.

a) The calculation and recommendations of normative

values of indicators characterizing the level of the financial

condition of the enterprise;

b) Analysis and assessment of the financial condition of

the enterprise. The use of the matrix analysis method makes it

possible to develop a forecast for the development of the

situation and a strategy for the conduct of the enterprise at

each stage of its life cycle.

The next stage (youth) is characterized by the

development of production processes in terms of eliminating

the discovered shortcomings in design and technological

training, which ends with the development of production and

the transition to mass production.

The main problem at this stage in the development of the

enterprise is the supply of the necessary resources for its

current activities while increasing the market share and

Consideration of these factors and the main condition for

the formation of the property of the enterprise, consisting in

the fact that financing of non-current assets should be carried

out at the expense of own funds and long-term liabilities, and

current assets at the expense of own funds and short-term

liabilities, makes it possible to calculate and use indicators as

recommended values financial condition for enterprises that

are at different stages of the life cycle (4, 13) (Table 1).

Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 890-893

Table 1: Recommended values of indicators of financial condition, depending on the stage of the life cycle of the enterprise (1)

Stages of enterprise life

cycle

Value of absolute

liquidity ratio,

ALR,%

Value of current

liquidity ratio,

CLR,%

Value of equity

ratio,

Value of working capital to

current assets ratio, WCCAR, %

ER,%

≥0.2

≥30

Start-up (Origin)

Youth

Development

Growth

≥2

≥10

≥100

≥10

≥20

≥30

Maturity

≥30

The calculation is carried out according to generally

accepted formulas presented in the educational literature on

economic analysis (3, 14, 18, 19). Let us explain the values

presented in the table.

scale enterprise in the activity of which a large number of

expensive fixed assets is used is impossible without

borrowing funds. Borrowing capital consisting of borrowed

funds from other organizations, funds from extra-budgetary

funds, bank loans, funds from the issue and sale of company

bonds, budgetary allocations on a repayable basis, etc., is the

main condition for ensuring expanded reproduction of the

market economy.

The next factor influencing the results of the analysis of

the financial condition of the enterprise is the industry. In

countries with developed market economies, the

recommended normative values of solvency and financial

stability ratios are differentiated by industry and sub-sector,

in Russia, this factor is not taken into account when analyzing

the financial condition of an enterprise, while it is the

industry that determines the structure of its assets; production

technology; the degree of risk of activity, the social

significance of the products, etc. For example, industrial

enterprises are characterized by a complex production

technology and a high share of non-current assets in the

structure of the enterprise’s property. To finance their

activities, industrial enterprises use both their own and

borrowed funds in the context of short-term and long-term

obligations. The presence of a high share of the company's

equity reduces the risk of its activities.

1. The recommended absolute liquidity ratio (Cal), which

corresponds to the normal financial condition, is 2% and is

explained by the fact that enterprises located at the stages of

origin, youth and development are not able to have free cash

in their accounts, as a result of large investments in

preparation and development production. At the stages of

growth and maturity, there is the possibility of forming a free

cash balance in accounts, at the same time, the share of

borrowed funds in the liabilities of the enterprise is

noticeably reduced, which makes it possible to set the

recommended value at ≥10%.

2. In accordance with the theory of economic analysis,

the formation of non-current assets should be carried out at

the expense of own funds and long-term liabilities, and

current assets - at the expense of own funds and short-term

liabilities. Compliance with this condition provides for a

current liquidity ratio of at least 100%, which will be

sufficient for the enterprise at the stage of its formation. If the

current liquidity ratio is below 100%, it indicates that part of

the short-term liabilities is aimed at the formation of non-

current assets.

The recommended value of the coefficient of

The activities of agricultural enterprises proceed under

specific conditions, which are characterized by a high level of

instability, uncertainty and risk, which in turn leads to the

insolvency of a significant share of agricultural enterprises.

This fact necessitates the development of an anti-crisis

program of the enterprise, which ensures the stability of its

financial situation.

autonomy at the stages of formation (origin), youth and

development are proposed based on the results of the

evaluation of the balance sheet of enterprises that are at the

stage of their formation and amount to 0.2%. A noticeable

decrease in the share of borrowed funds of the enterprise in

the sources of formation of its property at the stages of its

growth and maturity determines the establishment of a

standard of ≥30%.

Methods

4. The value of the ratio of own working capital assets,

In the course of the study, the authors applied the

similar to the current liquidity ratio, is calculated solely

subject to the conditions for the formation of non-current

assets at the expense of own funds and long-term liabilities,

and current assets - at the expense of own and short-term

borrowed funds (4, 15, 16). The recommended value of 10%

is established based on the fact that in the early stages of the

life cycle, the functioning of the enterprise occurs to a greater

extent at the expense of borrowed funds.

Another significant factor in the analysis of the financial

condition of the enterprise should be noted the scale of its

activities, which determines the size of the enterprise. The

scale of the enterprise is determined by the volume of

marketable products in value terms, the value of fixed assets

and the number of personnel. The organization of a large-

following methods:

1) Selective analysis of specialized literature with a high

citation index on the topics indicated in the title of the article.

In particular, traditional and author's methods of analyzing

the financial condition of the enterprise, including models of

foreign authors, were studied.

2) An analysis of the applicability of domestic and

foreign methods of economic analysis and the reliability of

the conclusions obtained by using the system of normative

values of economic indicators adopted as the basis was

carried out.

Journal of Environmental Treatment Techniques

2019, Special Issue on Environment, Management and Economy, Pages: 890-893

interested person in order to establish the threat of the

appearance of signs of his insolvency (bankruptcy) in the event

of a lump-sum payment of this person's tax." Retrieved from:

http://www.consultant.ru/document/cons_doc_LAW_115519/

Results and Discussion

Despite certain achievements in the field of economic

analysis, the shortcomings of existing methods for assessing

the financial condition of an enterprise are identified, which

consist in ignoring the specifics, scale, and stage of the life

cycle of an enterprise in the recommended values of financial

condition indicators established by economists.

Order of the Ministry of Economics of the Russian Federation of

01.10.1997. 118 "On approval of the Methodological

recommendations on the reform of enterprises (organizations)."

Retrieved from:

№

http://www.consultant.ru/document/cons_doc_LAW_16859/

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The results of the analysis using traditional methods are

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Firstly, for all enterprises, regardless of the features

of their activities, a standard set of standard values is used;

Secondly, the values are established by theorists

based on the following principle of formation of enterprise

assets: non-current assets should be financed from equity and

long-term liabilities, and current assets should be financed

from equity and short-term liabilities.

9. Altman EI. Financial Ratios, Discriminant Analisys and the

Prediction of Corporate Bankruptcy. The Journal of

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Research.1966:230-234.

Thirdly, foreign authors' models are based on the

results of research of their enterprises, without taking into

account the characteristics of the Russian economy (Altman,

Beaver, Tuffler-Tishou).

In this regard, the effective management of the financial

condition of the enterprise requires the development of

individual standards.

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Summary

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A study of existing methods and techniques for analyzing

the financial condition of the enterprise showed that their

application does not allow a real assessment of its solvency

and financial stability.

Conclusions

The proposed recommended values of solvency and

financial stability indicators, taking into account the stage of

the enterprise’s life cycle, industry and the scale of its

activity, will make it possible to give a more objective

assessment of the financial condition of the enterprise,

therefore, it will improve the quality of managerial decisions.

Acknowledgements

The work is performed according to the Russian

Government Program of Competitive Growth of Kazan

Federal University.

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