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Optimization of the Financial Condition of the Company

General info on the company’s financial condition optimization

Even the most successful business can face problems with the financial situation, which may be caused by poor management, changes within the industry, etc. The enterprise financial optimization process involves the application of the complex of steps, aimed at detecting causes of changes in the firm’s financial condition and defining methods of its improvement. This complex is also referred as the technology of the company’s financial condition optimization.

Problems and difficulties affecting the company’s financial condition

Problems and difficulties that occur in the company’s financial condition usually have some common features. They can be grouped into the following sets:

  1. Problems connected with the lack of funds, bad financial solvency. This means that the company is facing problems with paying its short-term obligations or has a high risk of facing such problems in the near future. Indicators of the low debt-paying ability are bad liquidity indicators (significantly different from normative values), overdue accounts payable and enormous debt owed to budget, employees, and credit organizations.
  2. Unsatisfying return on stockholders’ equity (low revenues level for company’s owners, low profitability). This means that the level of revenues generated by the company is not adequate to the capital invested by owners. This would possibly lead to the negative estimation of the company’s management.
  3. Low financial sustainability. This means there is a high chance of the company having problems with paying off its debt in future. In other words, this means dependence of the company on creditors and loss of the self-sufficiency. Not being financially sustainable enough for the company means risks of not being able to meet its obligations, while the financial condition of the firm would be highly dependent on external sources of financing. Signs of the low financial sustainability are the decrease of the autonomy indicator to the level lower than normative, negative equity, the decrease of the net working capital to the value lower than optimal, etc.

Generally, all described problems can be caused by two basic factors:

  • Lack of possibilities to keep the financial condition on the satisfactory level (or low profits);
  • Unreasonable management of the operating results (unreasonable finance management).

That said, troubles with solvency, profitability, financial sustainability have common causes: either the enterprise performance indicators aren’t good enough to keep the financial condition on the satisfying level, or the firm’s finance management quality is on the unsatisfactory level.

An insight into the process of the company’s financial condition optimization

Basic for the process of the company’s financial condition optimization is finding, which of the factors has caused the problem. Depending on that managerial decisions can be made, aimed at the financial condition improvement. At the same time, simply finding the problematic area is not enough. The detailed analysis of the company’s actions and industry changes is needed.

The potential ability of the enterprise to keep the financial condition on the satisfactory level is determined by the volume of revenues generated. Main components that affect the revenue are prices and sales volume, cost of goods sold and income from other activities. The analysis of profit and loss from the company’s activities is being applied with the use of the income statement and profitability indicators. To estimate the level of fixed and variable expenses and the relationships between prices for the used resources and the sold product the marginal analysis is applied.

The cost of goods sold increase can be caused not only by suppliers but also by the company itself. High expenses for electricity, heat, water and other resources can be a consequence of the absence of the control for the resource consumption. In some cases the necessity of decreasing the expenses needs decisive actions, such as decreasing the fixed assets amount.

The company can’t keep the whole amount of the generated revenue in its possession. Part of it is being used to cover different fees, accounts payable, non-production activities, etc. Limitation of these expenses can also become a way of profit optimization, and thus the financial condition optimization. Three key parts of the company’s operating results management are current assets management, investment policy management and source of finance management.

Summary

Considering everything mentioned, there are two main ways of the optimization of the company’s financial condition: optimization of the operating results (the firm should generate greater profit) and reasonable management of the working results. However, the optimization of the financial condition by increasing the reasonability and efficiency of the working results usage is an efficient, yet exhaustible way. Should be remembered that the basis for the stable financial condition in a long run is the generated revenue.