liquidity shows whether the organization has enough working capital to cover its current liabilities as they fall due.
2. Financial sustainability shows the degree of the organization’s dependence on external funding and helps predict its solvency in the long run.
3. Return on sales is a comprehensive measure of the efficiency of material, labor and monetary resources utilization. A decrease in this figure means either a decrease in sales or inefficiency of economic activity.
These three indicators were chosen in the methodology as the key to analyzing the financial performance of the social enterprise, demonstrating how efficiently it is managed economically over several aspects. Current liquidity shows financial reliability and sustainability of the organization in the short run (ability to pay bills within a year). The financial sustainability ratio shows the capital structure – this indicator describes long-term financial reliability and the ability to meet its obligations in the long run. It is important for a social enterprise not to become overly indebted. Return on sales shows managerial efficiency, proper estimation of revenues and expenditures and cost control.
The influence of each indicator on the final score is based on the assigned weight (see Figure 2):
Current liquidity – 0.4;
Financial sustainability – 0.3;
Return on sales – 0.3.
Figure 2. Indicator weights in calculating economic sustainability
The weight ratios between the three indicators are close, but the current liquidity is given a somewhat larger weight. The standard level of the current liquidity ratio means the organization has a reliable financial position in the current year, and therefore can improve the other two indicators for the year. If, however, the organization cannot cover its liabilities in the current year, the prospect of long-term reliability and efficient distribution of current revenues and expenditures does not warrant complete protection against the bankruptcy risks.
The final formula for the economic sustainability indicator is obtained as a weighted total of current liquidity, financial sustainability and return on sales according to the following formula:
Economic stability = 0.4 * Current liquidity + 0.3 * Financial sustainability + 0.3 * Return on sales
INDICATOR FORMULAS AND DEFINITIONS
1. Current Liquidity (CL) is the ratio of the value of short-term assets (STA) to the value of short-term liabilities (STL) of the social enterprise.
CL = STA / STL
Short-Term Assets (STA) are company property, receivables, and other items that are involved in income generation: for example, cash in bank and on hand, accounts receivable, inventories, raw materials, deposits in banks, stocks and bonds of other companies. Short-term assets are consumed or sold in less than a year.
In the balance sheet form, short-term assets are reflected in the following lines (see Table 1).
Table 1. Types of current assets in the balance sheet form
Short-Term Liabilities (STL) are debt obligations of the enterprise maturing within one year. Short-term liabilities of the organization include: accounts payable (short-term obligations to pay suppliers for the goods delivered, obligations to buyers in case of down payment for products, obligations to other creditors), short-term bank loans, taxes and wages payable.
In the balance sheet form, short-term liabilities are reflected in the following lines (see Table 2).
Table 2. Short-term liabilities in the balance sheet form
The essence of the Current Liquidity ratio is that it allows you to determine whether the organization has enough working capital to cover its current liabilities as they fall due. The CL indicator helps evaluate the organization’s solvency.
STANDARD INDICATORS:
The standard optimal value of CL is in the range from 1.5 to 2.5, depending on the industry. The current liquidity ratio of 3 and above indicates an unreasonable capital structure and slower turnover of funds invested in inventories.
2. Financial sustainability (FS) is the ratio of Shareholders’ Equity (SE) to liabilities on Borrowed Funds (BF).
FS = SE / BF
Shareholders’ Equity (SE) is the value of all non-monetary and monetary property owned by the company, less the value of all its outstanding liabilities.
The shareholders’ equity is calculated using a simple method: just take the sum total of line 1300 of the balance sheet.
Detailed breakdown of the shareholders’ equity is given in the balance sheet in the following lines (see Table 3).
Table 3. Shareholders’ equity in the balance sheet
Borrowed funds (BF) are the property and money of third parties raised by the company for a certain period of time for use in its activities, subject to a payment of interest.
In the balance sheet, there are two lines reflecting borrowed funds: line 1410 “Borrowed funds” and line 1510 of the same name.
The essence of the Financial Sustainability ratio is that it shows the degree of dependence of the organization on external funding and helps predict its solvency in the long run.
STANDARD VALUES:
The standard value for the ratio is considered to be above 0.8.
3. Return on sales (ROS) is the ratio of profit (P) to Sales Revenue (SR). The figure needs to be multiplied by 100 to convert to percentage.
ROS = P / SR * 100 %
Profit (P) is the positive difference between the total revenue (which includes revenue from the sale of goods and services, fines and compensation received, interest income, etc.) and the costs of production or purchase of goods, storage, transportation, sales of the organization’s goods and services. Profit = Revenue – Expenditure (in monetary terms).
In the balance sheet, profit is shown on line 2300.
Sales Revenue (SR) is the amount of money received by the enterprise when selling goods and services for the period. It is defined as the volume of goods and services sold multiplied by their selling price.
In the balance sheet, revenue can be found in line 2110.
The essence of the Return on Sales ratio is that it comprehensively reflects
