CREDITWORTHINESS AND FINANCIAL BALANCE — KEY INDICATORS FOR THE FINANCIAL HEALTH OF AN SME IN THE TRADE SECTOR

Internal Auditing & Risk Management Year XX, No 2(72) September 2025 9 CREDITWORTHINESS AND FINANCIAL BALANCE — KEY INDICATORS FOR THE FINANCIAL HEALTH OF AN SME IN THE TRADE SECTOR Oana-Letiția CĂTUȚOIU (AIRINEI), PhD Student „Eugeniu Carada” Doctoral School of Economic Sciences, Faculty of Economics and Business Administration, University of Craiova, Romania [email protected] Mariana MAN, PhD Professor „Eugeniu Carada” Doctoral School of Economic Sciences, Faculty of Economics and Business Administration, University of Craiova, Romania; Faculty of Economic, Administrative and Social Sciences, University of Petrosani, Romania; ORCID: 0000-0002-9018-3052 [email protected]; [email protected] Abstract: Trade activity is an essential component of the economy, facilitating the movement of goods from producer to consumer. In the context of sustainable development, trade is of strategic importance in the optimal development of economic and social systems. In order to carry out this article, we have chosen the two largest SMEs in the S-V Oltenia region, Romania, by turnover in 2023, in the field of trade. In order to carry out the brief diagnosis in terms of financial health, we have chosen as main indicators, on the one hand, creditworthiness to assess the degree to which SMEs are able to pay their obligations on the basis of the assets held, and on the other hand, the analysis of financial balance to reflect on the equality between financial sources and the economic means necessary to carry out trade activity. In this regard, in addition to the theoretical aspects analyzed, the paper is based on a brief financial analysis in the form of balance sheets for the period 2021-2023, while also highlighting how the management of financial and accounting information is used for managerial decision-making. The research question was: Is creditworthiness and financial balance important in making financial decisions at the SME level? The results showed that the indicators addressed reflect the concordance between the sources of financing and the payment needs of SMEs in carrying out the activities they carry out, as well as the development needs required by the market and consumers. Keywords: creditworthiness, financial balance, financial position, SMEs JEL Classification: M41, G10, L25 Internal Auditing & Risk Management Year XX, No 2(72) September 2025 10 1. Introduction SMEs represent the main source of economic growth in a State with a functioning market economy. SMEs represent the backbone of socio-economic progress. According to the book ȚUser’s Manual for the Definition of SMEs”, published by the Publications Office of the European Union in 2015 in Luxembourg, “Nine out of ten companies are SMEs, and SMEs generate two out of three jobs”. SMEs, through the easy way of establishment and operation, stimulate entrepreneurial spirit and innovation. As production develops, trade becomes permanent and is imposed as a vital necessity for society, simultaneously ensuring the satisfaction of consumption and the continuous perpetuation of production (Cardula, 2018). Trade is an activity with a particularly high share within an economy, aiming at a commercial transaction between the seller and the buyer. SMEs constitute a major point of interest in terms of carrying out trade activity, as they represent the pillar of the economy that contributes significantly to the creation of added value and employment. The creditworthiness of the economic entity refers to its liquidity and solvency (Gomoi, 2020). In this sense, the main indicator for assessing the financial situation of an entity for a short period of time is the liquidity of the balance sheet (Stratila and Golan, 2017). Liquidity and solvency represent the ability of the economic entity to meet its maturities. The connection between the payment capacity of economic entities and their liquidity and solvency can be expressed as follows: a) asset liquidity represents the property of asset elements to transform into cash, b) balance sheet liquidity represents the ability of the economic entity to honor its short-term debts, c) long-term solvency = the ability of the economic entity to meet its long-term debts. The financial balance of SMEs is based on the liquidity of assets and the demandability of equity and debts, corroborated with the duration of use of the first category of structures, respectively with the duration of allocation of the second (Gomoi, 2023). Financial balance is considered fully achieved when at the end of a financial year the activity carried out generates liquidity. The financial diagnosis aims to carry out an analysis of the financial position, but also of the financial performance of the SME at the end of the annual financial year in order to determine the strengths and weaknesses that define financial management. Financial balance can be defined as the ability of SMEs to ensure, from their revenues, the uninterrupted payment of current debts generated by the conduct of their business or by the tax legislation in force, so that they can avoid the risk of bankruptcy. Internal Auditing & Risk Management Year XX, No 2(72) September 2025 11 Maintaining financial balance is the essential condition for the survival of SMEs, and the assessment of financial balance must take into account the concrete conditions that led to the emergence of insolvency (Codreanu, 2023). 2. Literature review Assessing the solvency and liquidity of SMEs is a key aspect for ensuring their financial stability and competitiveness in the market. Creditworthiness defines the degree to which SMEs are able to honor their obligations based on the assets held, including, on the one hand, liquidity, which aims to confront shortterm debts with current assets, and on the other hand, solvency, which reflects the confrontation of total debts with total assets held (Gomoi, 2023). The main directions for improving financial stability and, consequently, increasing solvency include (Shirinov et al., 2025): • increasing profit and profitability of operational activities; • rational use of net profit, taking into account the interests of all participants in the economic and financial process; • increasing the efficiency of fixed asset distribution; • correct use of borrowed financial resources. Financial equilibrium can be determined by comparing the liquidity of assets with the demandability of liabilities, thus generating three essential indicators: working capital (WC), working capital requirement or need (WCN) and net treasury (NT). The indicators used to establish financial equilibrium are presented in Table 1 as follows (Anghel et al., 2019): Table 1. Indicators used in assessing financial balance Crt. no. Indicator name Calculation formula Interpretation 1. Working capital (WC) WC = AC - DTS WC = CP - AI WC > 0 Long-term financial balance; WC = 0 Tension in long-term uses and resources; WC < 0 Long-term financial imbalance. 2. Necesarul de fond de rulment ( NFR) NFR= (S+C) -DTS WCN < WC Short-term financial balance; WCN = WC Tension in short-term uses and resources; WCN > WC Short-term financial imbalance. 3. Trezoreria netă (TN) TN = FR-NFR NT > 0 Current financial balance; NT = 0 Tension at the liquidity level; NT < 0 Current financial imbalance. Source: Own processing based on the Balance Sheet for the period 2021-2023 Internal Auditing & Risk Management Year XX, No 2(72) September 2025 12 where: CA = current assets, STD = short-term debts, E = equity, Fa = fixed assets, S = stocks, R = receivables. Information about liquidity and solvency is useful for assessing the ability of an SME to meet its due debts (Grigorescu, 2019). The determination of liquidity and solvency can be achieved, according to Table 2, as follows: Table 2. Indicators used in assessing liquidity and solvency Crt. no. Indicator name Calculation formula Interpretation 1. Current or general liquidity (Cl) Cl = (Sticks + Receivables + Liquidities) x 100 / Short-term debts Between 1 and 2 or between 100% and 200% Reflects the ability of SMEs to cover their short-term debts based on current assets. 2. Quick liquidity or acid test (Ql) Lr = (Receivables + Liquidities) x 100 / Short-term debts Between 0.6 and 1 or between 60% and 100% Reflects the ability of SMEs to cover their short-term debts based on receivables and liquidity. 3. Immediate or ondemand liquidity (Il) Il = Liquidities x 100 / Short-term debts Between 0.2 and 0.6 or between 20% and 60% Reflects the ability of SMEs to cover their short-term debts based on liquidity. 4. General solvency Total assets / Liabilities < 1.66 or over 166% = no insolvency risk Between 1 and 1.66 or between 100% and 166% = moderate insolvency risk > 1 or under 100% = imminent insolvency risk, insolvency Source: Own processing based on the Balance Sheet for the period 2021-2023 In the case of the financial position, the analysis is carried out based on indicators determined using information from the balance sheet, namely the net position, working capital, working capital requirements and net treasury, which also reflects financial balance, along with other indicators of financial performance (Țilică, 2019). In a modern market economy, economic stability and solvency are considered important characteristics of the financial activity of an SME. Analysis of the solvency of an SME helps to reduce its internal costs, and an effective assessment of its solvency and liquidity can influence sales growth and strengthen its position in the market (Bakaeva and Taguzloev, 2024). Internal Auditing & Risk Management Year XX, No 2(72) September 2025 13 3. Research methodology To carry out the applied analysis, the two largest SMEs in the S-W Oltenia region, Romania, were selected based on their turnover in 2023 in the trade sector. To this end, the website https://membri.listafirme.ro/pagini/p1.htm was accessed and the following selection criteria were applied: • active companies; • counties: Gorj, Vâlcea, Dolj, Mehedinți and Olt; • fields of activity: trade; • sort companies by turnover in descending order; • filter: currency lei; number of employees minimum 1maximum 249. Hereinafter, for reasons of confidentiality, the generic name of the SMEs analyzed will be SME1 and SME2. The research methodology used for writing this article is classic, based mainly on reviewing the annual financial statements of the two entities, in order to identify important economic and financial indicators for studying their financial diagnosis. These can be indicators of the structural analysis of the elements of assets, debts and equity, as components of the financial statements, as well as indicators regarding the analysis of liquidity and solvency, as well as of the financial balance through the perspective of working capital, working capital requirements and net treasury. 4. Research results The starting point in the economic analysis and establishing the financial balance of the analyzed SMEs is the balance sheet, reflected according to Table 3 below: Table 3. Balance sheet of SMEs in the period 2021-2023 Crt. no. SME Component patrimonial elements Year -lei2023 2022 2021 1. SME1Intangible assets 189466 313341 247691 Tangible assets 46069651 38444435 32111580 Financial assets 52848729 52848729 10660 Fixed assets 99107846 91606505 32369931 Stocks 8140598 5001465 4447724 Receivables 15042668 8836222 5167713 Cash availability 3646912 3079015 7556408 Current assets 26830178 16916702 17171845 Advance expenses 212977 8613268 7271683 Total active 126151001 117136475 56813459 Internal Auditing & Risk Management Year XX, No 2(72) September 2025 14 Equity 55215986 38156257 26667099 Long-term debts 46242288 49391867 13762707 Permanent capitals 101458274 87548124 40429806 Short-term credits 9605103 8669285 7510106 Suppliers and assimilated 9760116 5603847 2495263 Other operating debts 2219962 10263972 1275818 Total debts 67827469 73928971 25043894 Provisions 3000000 0 0 Advance income 107546 5051247 5102466 Total passive 126151001 117136475 56813459 2. SME2Intangible assets 36220 53892 9390 Tangible assets 340409710 324284161 283135094 Financial assets 1383956 1403765 909545 Fixed assets 341829886 325741818 284054029 Stocks 701338738 666024957 470595042 Receivables 663167900 224528995 202081290 Cash availability 19118617 55885147 -55216866 Current assets 1383625255 946439099 617459466 Advance expenses 6872688 3616201 3210937 Total active 1732327829 1275797118 904724432 Equity 13350073 239313097 133739466 Long-term debts 54546723 73457354 87045973 Permanent capitals 67896796 312770451 220785439 Short-term credits 1359042602 828367612 531125162 Suppliers and assimilated 266628762 117702009 128168479 Other operating debts 36003051 14169037 21810861 Total debts 1716221138 1033696012 768150475 Provisions 1626402 1626402 1626402 Advance income 1130216 1161607 1208089 Total passive 1732327829 1275797118 904724432 Source: Own processing based on the Balance Sheet for the period 2021-2023 Taking into account Table 3, at the SME1 level, the supremacy of fixed assets compared to current assets is noted, as well as a constant increase in these elements throughout the analyzed period. The increase is due, on the one hand, to the increase in tangible assets by 19.72% in 2022 compared to 2021 and by 19.83% in 2023 compared to 2022. On the other hand, there is also an increase Internal Auditing & Risk Management Year XX, No 2(72) September 2025 15 in financial assets by 52,838,069 lei in 2022 compared to 2021, with their value remaining unchanged in 2023. As for current assets, their increasing trend is constant, as a result of the constant increase in stocks and receivables. Observing the permanent capital, an increasing trend is noted, a favorable aspect for SME as a result of the increase in equity by 43.08% in 2022 compared to 2021 and by 44.71% in 2023 compared to 2022. At the same time, the increase in permanent capital is also corroborated by the decrease in long-term debts by 35,629,160 lei in 2022 compared to 2021 and by 3,149,579 lei in 2023 compared to 2022. The fluctuation of debts is also noted, as a result, in particular, of the increase in short-term debts. Thus, in 2022, the value of debts increases by 48,885,077 lei compared to 2021, and in 2023, their value will decrease by 6,101,502 lei as a result of long-term debts and other operating debts. As for SME2, it shows an increasing trend in balance sheet assets throughout the analyzed period as a result of the increase in stocks by 41.53% in 2022, compared to 2021, and by 5.30% in 2023, compared to 2022. At the same time, there is also an increase in receivables in 2022 by 11.11% compared to 2021 and by 195.36% in 2023 compared to 2022. Taking into account the main activity of SME5, namely wholesale trade of cereals, the constant level of stocks is validated by the seasonal nature which implies high demand in certain periods of the year. A fluctuation in permanent capital is also noted as a result of the decrease in equity in 2023 by 94.42% compared to 2022, a decrease also supported by the decrease in long-term debts of 27.74% in the same reference period. The creditworthiness of the SMEs surveyed is reflected in Table 4, as follows: Table 4. Calculation of specific liquidity and solvency indicators Crt. no. SME Indicator name Year -%- 2023 2022 2021 1. SME1Current liquidity 1,24 0,69 1,52 Quick liquidity 0,87 0,49 1,13 Immediate liquidity 0,17 0,13 0,67 Equity solvency 0,44 0,33 0,47 General solvency 1,86 1,58 2,27 2. SME2Current liquidity 0,83 0,99 0,91 Quick liquidity 0,41 0,29 0,22 Immediate liquidity 0,01 0,06 -0,08 Equity solvency 0,01 0,19 0,15 General solvency 1,01 1,23 1,18 Source: Own processing based on the Balance Sheet for the period 2021-2023 Internal Auditing & Risk Management Year XX, No 2(72) September 2025 16 Noting Table 4, regarding current liquidity, taking into account the optimal level between 1 and 2%, it is found that SME1, with the exception of 2022, records values within this range, thus the situation being favorable. SME2 records values below this reference level, but which nevertheless tend towards the lower limit of the range. Regarding quick liquidity, the optimal values are within the range of 0.6-1%, thus SME1 only manages to fall within this standard in 2023, the value tending towards the upper limit of the level. SME2 records values below this range. In this sense, the presence of stocks in the activity of SMEs causes the quick liquidity rate to have values outside the reference range. The immediate liquidity would have the reference range between 0.2-0.6% and thus SME1 only manages in 2021 to cover its short-term debts based on liquidity, in the following years recording values below this level. SME2 does not reach the minimum reference level in any of the three years, liquidity being thus insufficient for the payment of short-term debts. Taking into account the optimal level of 0.5 of patrimonial solvency, we find, in the case of SME1, that it does not present an optimal patrimonial solvency, but which tends towards this level, a positive aspect for the entity. In the case of SME2, the situation is unfavorable, as there is no financial independence. Regarding the general solvency, in the case of SME1 it has an oscillating but favorable evolution regarding the year 2023 in which it increased, thus managing to be outside the risk of insolvency. Regarding the situation for SME2, the indicator values present a moderate risk of insolvency, with the situation being unfavorable in 2023, given the decrease in the percentage compared to 2022. The only favorable aspect is that indebtedness is mainly based on short-term debts, which are temporary. In order to determine the safety margin and financial balance of SMEs, based on the information taken from the financial balance sheet, we determined and assessed a series of relevant indicators, namely: working capital, own working capital, working capital requirement and net treasury. At the same time, to assess the value created by SMEs, we calculated the cash flow, taking into account its importance for investors. The calculated indicators are presented in Table 5 as follows: Table 5. Calculation of indicators specific to financial balance Crt. no. SME Indicator name Year -lei2023 2022 2021 1. SME WC -87239579 -106404136 -21634756 NWC -90886491 -109483151 -29191164 NT 3646912 3079015 7556408 Cash-flow 567897 -4477393 0 Internal Auditing & Risk Management Year XX, No 2(72) September 2025 17 2. SME2WC -387142606 -160714267 -237736982 NWC -406261223 -216599414 -182520116 NT 19118617 55885147 -55216866 Cash-flow -36766530 111102013 0 Source: Own processing based on the Balance Sheet for the period 2021-2023 Analyzing Table 5, we find the following situations: • Within IMM1 WC presents negative, fluctuating, but favorable values at the level of 2023 as its value increases by 19164557 lei compared to the previous year. The negative values reflect a long-term financial imbalance. IMM2 also records fluctuating values of the indicator, the evolution being unfavorable at the level of 2023 as a result of the decrease in the value by 226428339 lei compared to 2022. Thus, a negative working capital is noted throughout the study interval, proof that SMEs are constantly faced with a long-term financial imbalance; • NWC presents negative values for both SMEs, which is not unfavorable considering that their activity does not generate working capital. The indicator presents significant fluctuations, reported in 2023 for SME1 by a decrease of 18596660 lei compared to 2022, and for SME2 by an increase in the value by 189661809 lei compared to the previous year; • NT has positive values in all three years within SME1, but oscillating, with a favorable trend for 2023. Thus, SME1 records a current financial balance. SME2 has an NT present in 2022 and 2023, representing an essential resilience factor for the entity; • For SME1 the cash flow situation is favorable, managing to register a positive value in 2023, with cash receipts being much higher compared to expenses in this time interval. For SME2, the situation is unfavorable; the increase in NWC in 2023 also has negative effects on cash flow, which, although in 2022 it has a positive value, in the following year the activity is unprofitable. 5. Conclusions Following the research conducted on SMEs in the S-W Oltenia region during the period 2021-2023, we can answer the research question: Are creditworthiness and financial balance important in making financial decisions at the SME level? by presenting their role. In this sense, creditworthiness through its component indicators, namely liquidity and solvency, reflects the extent to which current debts can be paid with the help of current assets and the extent to which the SME’s total assets can cover its total debts. Creditworthiness thus allows the identification of financial security at the SME level. Regarding