Field research

The analysis of balance solvency and liquidity

Figure 1. Dynamics of main financial coefficients for 2005-2009 and their recommended values.

Equity Capital/Total Assets ratio shows the share of equity in the total amount of all assets of the company. Minimum threshold should be at the level of 0.4. This restriction shows that all the obligations of the organization may be covered with their own funds. In considered business, this ratio in 2006 was approaching the threshold, but in 2008 (because of the crisis) fell to its lowest value (0.13). Analysis of this factor shows that the activities of the enterprise are largely dependent on borrowing.

Equity Capital/Total Debt ratio shows how much debt a company has attracted to 1 ruble invested in the assets of its own funds. The maximum recommended value should not exceed the value of 1.5. Exceeding the specified limits means the company’s reliance on external sources of funds, loss of financial stability (autonomy). In this enterprise, this factor in the last considered reporting period exceeded the recommended value in 2.8 times.

Availability of internal funds ratio illustrates the existence of the company's own working capital needed for its financial stability. The higher the value, the better the financial condition of the company is, so the greater its capacity is to conduct an independent monetary policy. In 2009, this ratio was 10 times less than the allowable threshold.

Margin of financial safety shows how much of an asset is financed by sustainable sources. Recommended value is not less than 0.6. Since the company was during the reviewed period in the long-term lending, rate of financial stability was within the realm of valid values.

Figure 2. Dynamics of main liquidity coefficients for 2005-2009 and their recommended values.

On the basis of data (see figure 2) analysis it can be concluded that considered enterprise is not able to make payments for all types of obligations - both immediate and in remote (Current ratio <1). Using its own funds the company can repay in short term through cash only 2% of the debt (Cash ratio = 0.02). However short-term obligations can be fully repaid from the proceeds of the calculations (Quick> 1). The acid test ratio in 2009 is equal to 1.54. This means that the company can pay current liabilities, mobilizing all the current assets. Analysis the own funds ratio shows that since 2008 the enterprise has virtually no working capital for its financial stability.

Characteristics of SPETSSTROY-SVYAZ ‘activities and analysis of the structure of its assets

As it can be seen at the figures 3 and 4, proportion of current assets in balance sheet structure is more than 70%, with the largest portion of current assets of accounts receivable. This can be explained by the fact that state and departmental businesses constitute the bulk of customers of the enterprise.

Figure 3. Structure of balance sheet of SPETSSTROY-SVYAZ Ltd for 2005-2009.

Figure 4. Structure of current assets of SPETSSTROY-SVYAZ Ltd for 2005-2009.

It can be observed at figure 4, that in 2007 the largest changes referred to the share of cash. When considering sales for a calendar year seasonality can be observed. In the first quarter customers form a portfolio, and in the fourth quarter there are the highest sales. In 2007, a large amount of cash was received in the last days of the year, making it difficult to use it.

It can also be noticed that in 2008 great changes have taken place in the dynamics of proportion change of work in progress. In 2007 in the enterprise there was implemented a new type of activity, development activities (R & D). Residues in progress - is an incomplete implementation phase of R&D. Since this type of activity is on average 5% in total sales the figures for the unfinished product does not have a major impact on the turnover of working capital.

Figure 5. Dynamics of shares of current assets components for 2005-2009.

Capital in process of production include: work in progress, semi-proper development and deferred expenses. Consider future expenditures:

Figure 6. Future expenditures for 2005-2009.

It can be seen in graph 4 that almost all kinds of future expenditures of the enterprise transfer their value to newly created products in the form overhead costs. The greatest share amounts to certification and licensing. The total share of these costs in revenue increased from 0.5% to 1% in 4 considered years. Large company's costs of certification and licensing of developed and manufactured products indicate that the state exercises strict control over the quality of wireline equipment in Russia.

Analysis of business activity

Figure 7. Average time of turnover of accounts receivable for 2005-2009.

Turnover of current assets or rate of turnover is a key indicator of the effectiveness of management, business activities and organization. Ratio characterizes the efficiency of use of all current assets, regardless of the source of their involvement, shows how much money units of products sold brought each monetary unit of current assets. In 2007-2008, the company increased revenue, but nonetheless turnover ratio of current assets has not increased. This is due to an increase in the average period of accounts receivable turnover. In 2008-2009, it was more than 3 months (see figure 7).

Figure 8. Rate of inventories turnover for 2005-2009.

Inventory turnover ratio shows number of turns of reserves and expenses for the period analyzed. Ratio indicates the rate at which stocks move into the category of receivables resulting from the sale of finished products. Slow inventory turnover indicates the presence of obsolete stocks.

Over the period 2007-2009 average period of turnover in inventories tended to decline, despite the fact that In 2009 supply of raw materials and increased

Figure 9. Term of receivables turnover for 2005-2009.

Accounts receivable turnover indicates its rate of turnover. The term of receivables turnover indicates how many days on average takes debt repayment. At the end of 2009 term of turnover of receivables was 97 days. This figure increased by 2.7 times compared with 2005 despite the fact that revenues from sales for the period increased by only 1.6 times. This negatively characterizes the activities of the company.

Designing a receivables management

Accounts receivable is an important part of enterprise assets. It should be noted that its share in total assets of the analyzed company on 1 January 2009 was 83%. Therefore the construction of an effective system of accounts receivable management and its stable functioning are among the most important areas of enterprise management.

Receivables in the economy have two important features:

• a source of free funds for the debtor;

• possibility of products and services market increase for the lender.

In real practice it is impossible to reduce accounts receivable to zero, but it is justified in relation to the outstanding part of it. In order to minimize the risk of overdue accounts receivable, that may lead business to losses, it is important to improve the management system.

Recommendations for development a policy of premiums for managers of Sales department

Bonuses are aimed at strengthening the material interest and increase employees' responsibility to improve the performance of the company. The main criterion for assessing employee’s performance is the fulfillment of individual sales plan is established by parish funds.

• Employees are eligible for current bonuses under the following conditions:

  • Fulfillment of the annual individual sales plan by more than 100%;

  • Reducing the value of accounts receivable;

  • Reducing the value of accounts payable for the supply of products, goods, works and services;

  • The observance of labor discipline;

  • Compliance with the requirements of the job, labor law, requirements for the protection and safety.

• Lump-sum bonus payment can be made:

  • For qualitative and timely execution of critical tasks, and especially urgent work, occasional task of leadership;

  • On the basis of a successful employee performance.

The size of the current premiums is determined by the coefficient for the calculation of premiums:

• 0.0033 - for calculating premiums in the performance of individual sales plan within the more than 100% to 150%;

• 0.0066 - for calculating premiums in the performance of individual sales plan from 150% to 200%;

• 0.01 - for calculating premiums in the performance of individual sales plan of more than 200%.

Current premiums are charged to employees in accordance with the personal result of work of each employee as follows: (AFP-P)*k – CP, where:

AFP – actual sales plan fulfillment

P – individual sales plan

k – coefficient for premium calculation

CP – current premium accrued since the beginning of the year

Proposed policy can help the company to decrease its accounts receivable.

Interview

1. How do you assess the financial condition of the company?

After the crisis of 2008, in my opinion, the economy is still at a low level. Orders of government and departmental enterprises and organizations, our main customers, have decreased. Furthermore creditworthiness of all customers has dropped significantly. In 2011, we have not yet reached the level of 2008 and even 2007 in sales. During the 2010 financial state of the enterprise deteriorated even compared with 2009.

2. What do you think about the proposed policy?

I hope the motivation system of sales managers, will help the company reduce the term of turnover of receivables, but only one measure is not enough

3. Have the similar measures to reduce the accounts receivable been conducted before?

The company has attempted to reduce receivables, but in other ways, by offering leasing schemes, by working with our customers by security of the enterprise. Unfortunately, these measures have not brought significant results. Among the financiers of customers, unfortunately, there are few professionals who can appreciate the leasing operations. Employees of departments and state enterprises are "tied" to corporate foundations. In such organizations, even insignificant change in the form of contract is very problematic. However, they realize that sue to recover the debt is not in the interests of the supplier, because there is a high probability that this company will lose other orders from these contractors.

4. What are the problems regarding current assets faced by the industry?

Firstly, businesses that develop equipment of wire communication lose customers, not only because of the active market entry of services of mobile operators, but also because of the active "recommendations "of the Russian government for the similar equipment of European manufacturers, which is not always justified by the quality of their products.

Secondly, Russia produces very few components that meet modern requirements (e.g., chips at various levels).

Thirdly, regulatory framework that determines the equipment requirements for wire communication, as well as the quality management system is often interpreted by each department in its own way, and as a consequence, we are forced to incur substantial expenses. Thus there is no guarantee that these costs will be paid back.

5. What are your predictions for the financial condition of the enterprise for the next year or two?

The company today maintains an active policy to diversify the portfolio of sales, to reduce accounts receivable and enters the regime of austerity. So I hope that by 2013 the company will come out of crisis