Marco Jurídico aplicable

In contrast to the above presented indicators that obviously suffered some oscillations, solvency and liquidity of entrepreneurial organizations in the Republic of Serbia recorded gradual decline since 2004. That, among other things, led to the blockade and the closing of many entrepreneurial organizations in the Republic of Serbia.

Liquidity, in general, is a serious problem of the Serbian economy. According to the latest data, the amount of debt that hinders the smooth operation of nearly 60,000 organizations in Serbia, now exceeds 172 billion dinars. When we add both regular and default interest, the current indebtedness of organizations in Serbia is even higher. Given the fact that the Republic of Serbia has 104,406 active companies and more than 200,000 entrepreneurs, it follows that, because of the received debts, every fifth entrepreneur is blocked (Večernje novosti, 9.4.2012). It appears that dealing with the problem of liquidity is one of the most serious challenges faced by entrepreneurial organizations in Serbia.

Liquidity is the ability of entrepreneurs to meet their obligations within a certain period while maintaining the required scope and structure of current assets. As liquidity indicators, we mainly use: current ratio of liquidity, rigorous liquidity ratio and net working capital fund (Moore, Petty, Palich, Longenecker, 2008, 604).

Current ratio of liquidity indicates the ratio of current assets and current liabilities. Simply put, this ratio reflects how much dinars in current assets is covered with every dinar in due debts. The current ratio of liquidity is often considered an indicator of financial "health" and measure of the capacity of entrepreneurs to meet its current liabilities (to return short-term loans), with a margin of safety that would be sufficient to cover the possible reduction of some

elements of working capital (inventories and receivables). There is no generally accepted standard of what should be the preferred size of this ratio. This is because the ratio in question is caused by many different factors, such as the volume of business activity, the temporal setting of working capital, credit terms from suppliers in relation to the loan conditions, which are granted to customers, efficiency of collection of receivables, discipline of due debt payments etc. The size of this ratio below 1 indicates unsatisfactory liquidity and suggests that the entrepreneurial organization has lost a net working capital fund as well as that part of the short-term funds invested in long-term assets. Most often the size of the ratio of 1 is considered the lower limit of liquidity of the organization (Moore, Petty, Palich, Longenecker, 2008, 605).

Rigorous liquidity ratio is the ratio of liquid working capital of the organization (excluding inventories) and its short-term obligations. As acceptable standard we take 1:1 ratio. The ratio greater than 1 indicates excessive liquidity, while the ratio that is less than 1 indicates potential financial problems (Krasulja, Ivanišević, 2000, 23-25).

In addition to the indicators of liquidity for the assessment of long-term ability to settle obligations of entrepreneurial organizations we also may use information about its solvency. Solvency of the organization indicates its ability to, in longer term, ensure the return of borrowed funds, and it reflects the possibility of entrepreneurial organizations, at the time of liquidation, to secure payment of its own creditors (Marinković, Popović 2008, 54-56)4. As an indicator of solvency of the organization we can use solvency ratio. It is the ratio of own and borrowed funds of the company, and that shows with how many dinars of its own resources company covers every dinar of borrowed funds. Regarding this ratio there are no basic standards in terms of its optimal value. Typically, the lower boundary of the organization's solvency ratio is considered 1:1 (Ekanem, 2010, 123-138; Ranković, 136-137).

In a series of successive periods, as a reliable instrument for liquidity analysis of entrepreneurial organizations we can use the net working capital fund, and net current assets. Net working capital fund of an organization is its long-term sources of financing working capital, while net working capital is part of current assets that are financed by long-term funds. By monitoring the movement in net working capital one can trace the chronology of funding organizations in the past (Ekanem, 2010, 132-134).

Also, the relationship between current assets, inventories and net working capital fund of organization can be used to assess its ability to pay. It is common that the current assets of the organization, its reserves and its net working capital fund are in mutual correlation. The increase in net working capital in relation to the inventories points to the strengthening of working capital. Faster growth of

4

The key difference between liquidity and solvency is based on the fact that the analysis of these two categories is taken into account in the different time frames. Liquidity is the organization's ability to repay their debts over a period of time, while the solvency is its ability to repay debts in full.

inventories to net working capital fund is an indicator of reduced safety margins. The latter situation is considered to be justified only when the organization in some former period was too liquid. Otherwise, faster growth of inventories to net working capital fund is an indicator of worsening financial situation of the specific organization (Ekanem, 2010 pp.132-134). The movement of some of the liquidity and solvency indicators of entrepreneurial organizations in the Republic of Serbia in the period 2004 - 2010, is shown in Table1.

Table 1. The Movement of the Liquidity and Solvency Indicators

of Entrepreneurial Organizations in the Republic of Serbia in the Period 2004 – 2010

Year Current ratio of liquidity Rigorous liquidity ratio Solvency ratio Net working capital fund 000 eur Coverage of inventories ratio 2004 1,13 0,5158 0,61 26733 0,22 2005 1,16 0,5383 0,57 54035 0,21 2006 1,11 0,5312 0,47 55215 0,19 2007 1,10 0,5367 0,42 60146 0,18 2008 1,07 0,5249 0,35 41806 0,12 2009 1,04 0,5247 0,33 21170 0,07 2010 1,03 0,5356 0,33 20341 0,07

Source: Our own calculation on the basis of data obtained from

macroeconomic announcements of SBRA 2004-2010

As one can see on the basis of data presented in Table 1, the current ratio of liquidity of entrepreneurial organizations in the Republic of Serbia in the period 2004 - 2010 was ranged in the area of the lower bound of liquidity. Also, since 2005, until the end of the period, the liquidity ratio recorded a gradual, but permanent decline. Given the fact that it is a ratio that reflects the organization's ability to cover their own short-term liabilities with a margin of safety, it appears that the credit standing of entrepreneurial organizations in Serbia, became lower from year to year. This resulted in that the entrepreneurs in Serbia were forced to pay significantly higher interest rates for additional borrowings. The progressive increase in interest rates, or expenses for interest, had an impact on reducing the financial results of entrepreneurial organizations in Serbia, reducing their capital and deteriorating their liquidity. According to data presented in Table 1, rigorous ratio liquidity of entrepreneurial organizations in Serbia is also low, indicating their low ability to pay.

More serious problems and negative tendencies in the structure of funding of entrepreneurial organizations in Serbia are indicated by their solvency ratios.

According to data presented in Table 1, from 2004 – 2010, this ratio decreased by as much as 46%. Specifically, in 2004, the solvency ratio of entrepreneurial organizations in the Republic of Serbia had a value of 0.61. This means that every euro of borrowed funds was covered with a 0.61 euro of own funds. This relationship was dramatically worsened in 2010. In 2010, the solvency ratio of entrepreneurial organizations in the Republic of Serbia was 0.33. This means that during that year, each euro of borrowed funds was covered with only 0.33 euros of its own funds. It follows that the indebtedness of entrepreneurial organizations in the Republic of Serbia, the short-and long-term commitments from year to year, recorded permanent increase.

Analysis of data related to net working capital fund indicates its gradual increase from 2004 - 2007, as well as its decline after that period. But the degree of coverage of inventories with the long-term sources of funding gradually decreased during the whole period, which indicates that the rate of inventories growth was higher than the growth rate of net working capital. This unfavorable trend is due to the fact that inventories are part of current assets in which the cash is long-term blocked and it is desirable for them to be covered by long-term sources. Keeping in mind the fact that this ratio was far less than 1 throughout the period (when the coverage of inventories ratio is equal to one, it means that the entire stock is covered with long-term sources), only part of the inventories was covered by long- term sources of funding. Gradual reduction in the coverage of inventories ratio during the observed period indicates that the increasing share of inventories was covered by short-term liabilities. More specifically, in 2004 the net working capital fund was covering 22% of inventories, while in the last two years of the period (2009 and 2010) it covered only 7% of the inventories. Such a safety margin is not adequate for entrepreneurial business, as confirmed by a progressive increase in short-term liabilities, which have become several times higher than the equity and long-term liabilities. This leads to the conclusion that entrepreneurs in the Republic of Serbia in the period from 2004 - 2010 had serious problems with payment of obligations due (Ivanović-Djukić, Stefanović 2011, 365).

3. Analysis of Factors Affecting the Liquidity