Ways of improvement of solvency and financial stability of the Komi Republic companies

An analysis of the solvency of the Komi Republic companies revealed, that in 2014 the most important indicator of the analysis - the current ratio - has a value of 147%, that is does not fall within the scope of the optimal value of 150-200% (figure 1). The same picture was observed in the period 2010-2013. Thus, it can be concluded, that the current ratio changes from year to year and it does not necessarily fall within the scope of the optimal values. Therefore, the Komi Republic companies are required measures to increase solvency to prevent the fall of this indicator in subsequent years.

200% 150% 100%

50%

—♦— Current ratio

0%

2010   2011   2012   2013   2014

Figure 1 – The dynamics of the current ratio of the Komi Republic companies in 2010-2014

Ways of improvement of solvency of the Komi Republic companies may include the following activities:

• 1.    Quick sale of assets of companies.

• 2.    Increase of the rate of turnover of assets.

• 3.    Reduction of the operating cycle.

Solvency of the company is the company's ability to repay its debts on time, i.e. solvency is determined primarily by the quality of the structure and composition of current assets. Companies can pay off debts in time due to the rapid sale of assets. Therefore, the assets should be easy to implement. That is why the management of current assets means the balance between the costs of maintaining assets, which ensure smooth workflow; between the losses, associated with the risk of loss of liquidity and between incomes from involvement in the turnover of new funds.

Solvency depends on the rate of turnover of assets, as well as its compliance with the rate of turnover of short-term liabilities. Current activities of companies can be financed due to own resources. If the current activities of the organization are provided with short-term revenue, then loans, accounts payable may become the sources of additional funds. If the company has a reduction of turnover of assets, and the management does not take measures to attract additional sources, it can lead to a decrease of solvency, even if it is currently profitable. Therefore, if company wants to increase its solvency, it has to increase the rate of asset turnover.

Operating cycle is a length of time required for the purchase of raw materials, inventory, processing, subsequent sale and getting money for it. If the company has a tendency to increase this cycle, it is necessary to take measures to stabilize the financial situation. The reduction of operating cycle is a positive trend, because the need of working capital reduces. If the company wants to reduce the operating cycle, it can use the following measures:

• •    to shorten the storage stocks of goods and materials;

• •    to accelerate the turnover of accounts receivable;

• •    to slowdown the turnover of accounts payable.

An analysis of the financial stability of the Komi Republic companies revealed, that the equity ratio of companies was 67% in 2014, which is a good indicator, because the optimal value is 50% (table 1).

Table 1 - The ratios of the financial stability of the Komi Republic companies in 2010-2014.

Year	Equity ratio	Own funds ratio
2010	42%	-46%
2011	50%	-24%
2012	54%	-21%
2013	51%	-32%
2014	67%	-27%

A ratio of own funds is equal to -27% in 2014, although the optimum value is 10%. The negative sign of this coefficient indicates, that all current assets of companies (and possibly part of the non-current assets) are formed by borrowing funds. Thus, it can be concluded, that the Komi Republic companies have not got enough own funds to finance current activities.

Also companies’ accounts payables were increasing over the period from 92.9 billion rub. in 2010 to 160.4 billion rub. in 2014 (table 2). Overdue payables decreased until 2013, but in 2014 it increased to 16.9 billion rub., it is 10.5% of the total accounts receivable. The trend of increasing overdue payables says that the money were increasingly returning to the unspecified time.

Table 2 - Accounts payable of the Komi Republic companies in 2010-2014 (billion rubles)

Parameter	2010	2011	2012	2013	2014
Accounts payable	92,9	102,3	103,8	138,1	160,4
Overdue payables	14,9	16,8	8,5	11,0	16,9

Thus, the analysis showed that the Komi Republic companies necessary measures to improve financial stability.

Ways of improvement of financial stability of the Komi Republic companies may include the following activities:

• 1.    Improvement of monitoring and analysis of accounts receivable.

Companies have to control strictly the management of accounts receivable and monitor its quality, if they want to improve their financial condition.

Accounts receivable is the source of repayment of accounts payable. If the company will freeze the amount of calculations with buyers and customers, it can feel a shortage of funds, that can lead to formation of accounts payable, to delay in payment to the budget, extra-budgetary funds and so on. This in turn can lead to accrual of penalties and fines.

The effectively manage of accounts receivable includes the following:

• •    The monitoring of the status of settlements with customers and timely presentation of claims;

• •    The orientation to the maximum possible number of customers in order to reduce the risk of non-payment of one or more large customers;

• •    The monitoring of compliance payables and receivables [1, p. 68].

• 2.    Factoring operations.

• 3.    Submitting of discounts to customers for reducing the time of calculation.

• 4.    Formation of provision for doubtful debts.

• 5. The increase of equity capital.

Factoring allows businesses to refinance the primary part of receivables of the buyer in a short time, thereby it can reduce the period of the financial and operating cycle.

The advantages of factoring are the absence of collateral, the absence of need of opening an account for customer in a bank and also the reduction of risk for providers.

The disadvantages of factoring are the additional costs of the seller, relating to the sale of products, as well as the loss of direct contact with customers in their implementation of payments [1, p. 70].

This activity is beneficial for both supplier and customer. Moreover, it allows to extract some indirect benefits: balance liquidity improves as well as all the financial and economic performance indicators of the company, it reduces accounts receivable and also it helps to form a positive image of company, which thinks about its customers [1, p. 73].

Provision for doubtful debts represents receivables of the company that is not paid within the period specified by the contract, and does not provide with necessary guarantees. Provision can allow to save on the amount of income tax, also it mitigates the negative effects of bad debt, but does not eliminate them.

One more option, which can increase financial stability, is the raise of equity capital of the company, for example, through the issuance of securities and reinvestment of profits. It is necessary to evaluate the existing structure of liabilities. However a high proportion of borrowed sources in liabilities can threaten the financial sustainability of the enterprise.

Thus, this system of recommendations for improvement of financial stability and solvency of the Komi Republic companies can be used in the practice of financial management, that later will help to minimize the risks of the company, to improve its credit rating and to increase the efficiency.