ACCOUNTS RECEIVABLE TURNOVER IN THE METHODOLOGY FOR ANALYZING THE SOLVENCY OF A COMPANY

Abstract. In conditions of economic instability, effective working capital management is one of the priority directions for increasing a company's competitive advantages in the market. Rational utilization of working capital plays an important role in enhancing the financial stability of an economic entity and increasing the profitability of production. Accelerating turnover allows for the release of significant amounts of funds, thereby increasing production volumes without additional financial investments, and utilizing the freed-up resources according to the needs of the enterprise. One of the key indicators of the effectiveness of working capital utilization is the evaluation of their turnover. This article examines the development of methodological tools for analyzing turnover and solvency based on the analysis of mutual indicators of accounts receivable and accounts payable turnover.

Keywords: Solvency, turnover, accounts payable, accounts receivable.

The financial stability of a company refers to its ability to operate and expand smoothly, ensuring continuous production and sales, maintaining a balance between assets and liabilities in the face of economic instability, and preserving high solvency and long-term investment attractiveness within acceptable risk levels.

Financial stability is closely tied to the management of assets and liabilities, particularly working capital. Solvency represents a company's ability to meet obligations without violating contractual terms and is crucial for overall financial stability and adapting to market crises [1]. Effective management of working capital, which includes material and cash resources, is vital. Insufficient financial resources for inventory acquisition can disrupt production and hinder meeting plans, while optimal levels of accounts receivable and accounts payable are important considerations. Careful monitoring, rational utilization of working capital, and analysis of turnover indicators are necessary. Turnover ratios, calculated by dividing revenue by the average value of working capital, provide valuable insights. Table 1 presents the main turnover ratios [2].

Table 1

Calculation of turnover ratios

These ratios show the number of revolutions made by working capital during the period. At the same time, it is important to compare these coefficients obtained in a given period with the results of previous periods, i.e. evaluate them over time. This allows financial managers to identify the main trends in the efficiency of using working capital. If the number of turnovers made by working capital increases or remains stable, then the enterprise rationally uses monetary resources, which ensures the stability of its work and financial stability. If the trend shows a decrease in the number of revolutions made in the period under review, then it is necessary to look for the reasons for what happened, because this indicates an insufficiently effective working capital management policy.

Next, we will dwell on the development of methods for calculating working capital, in particular receivables, from the perspective of increasing the solvency of the organization. The practical implementation of such management requires the availability of information about the real state of accounts receivable and its turnover. We are talking about assessing the movement of accounts receivable.

This calculation method in Table 1 has a number of disadvantages, and in practice financiers make mistakes when applying it. The most common is to use the “net revenue” indicator taken from the income statement (financial results). In this report, revenue is presented net of indirect taxes (VAT and excise taxes). As a result, a problem of incomparability arises due to the fact that trade receivables contain indirect taxes. As a result, the estimated sales period is distorted, especially if the company is an excise tax payer.

The fact is that revenue from the sale of products is usually determined «at shipment» (accrual basis), and the reduction in customer debt occurs at the time of receipt of funds. The shipment of products results in an increase in accounts receivable and at the same time an increase in sales, which is the denominator of the formula. At the same time, there is no real reduction in turnaround time, since payment for shipped products is not made.

The problem is typical for companies that aggressively increase their sales by increasing the provision of deferred payments to customers.

Let's look at a hypothetical example. Table 2 presents data on revenue from shipment and payment, as well as data on the movement of accounts receivable and its turnover of the company Alpha-Light LLC.

Based on the data in Table 2, we can come to the conclusion that the company is increasing its product sales, but at the same time, the receipt of money in March is significantly lower, resulting in a sharp increase in accounts receivable. Let's calculate accounts receivable turnover. The result of the calculation in accordance with the traditional method is presented in line 5. For example, the repayment period for receivables in March is 29 days. In reality, the volume of buyer debt in March is much higher than the amount of cash received. And in reality, it may take about two months to pay off this debt. Thus, we can come to the conclusion that the calculation of the receivables turnover indicator for «shipment» does not always reflect the real situation at the enterprise. This is the main drawback of the traditional approach to calculating this indicator.

Table 2

Comparison of receivables turnover indicators for shipment and payment

Based on the above, we can come to the conclusion that the turnover period of receivables should reflect the period during which the debt will be fully paid. And this indicator becomes quite accurate only if shipments and payments are uniform over a long period of time.

These inaccuracies can be avoided if, in calculating accounts receivable turnover, instead of «shipment» revenue, the real amount of cash received for manufactured and sold products is used. In this case, the company's top management can correlate cash flows and the amount of accounts receivable even if there are seasonal fluctuations. In addition, the company will be able to assess the need to attract borrowed sources and avoid financial risks, including the risk of reducing financial stability.

Let's return to table 2. Line 6 shows the calculation of the turnover ratio using the receipt of funds for shipped products (payment) in the numerator. Thus, the turnover ratio in March was only 0.53 or 58 days, compared with 1.07 or 26 days with the traditional approach. In most cases, the receivables turnover period calculated «on cash receipts» gives significantly more accurate results, especially if the demand for the company’s products sold is subject to seasonal fluctuations, as well as a fast-growing business with an aggressive sales policy.

 In addition, this calculation of the indicator allows you to more accurately analyze the efficiency of work with receivables in the context of individual clients, channels or sales markets. In our opinion, the above calculations are relevant from the point of view of monitoring the financial condition of the organization.

CONCLUSION.

Considering the issues of improving the management of working capital - inventories, accounts receivable and accounts payable, as well as solvency for a specific business entity, as a recommendation, we can consider the development of individual indicators, which are based on the restructuring of assets and the cyclical nature of the production process of business entities, that is, redistribution occurs types of economic assets depending on the level of their liquidity and turnover, which serves as the basis for developing a methodology for calculating individual standard indicators of the financial stability of companies in the petrochemical complex. However, this issue is not considered within the framework of this study.