Bankruptcy of an enterprise can be determined long before it occurs. For this, various forecasting tools are used: the Fox model, Altman, Tuffler. An annual analysis and assessment of the probability of bankruptcy is an integral part of managing any business. Without the knowledge and skills to predict the insolvency of a company, the creation and development of a company is impossible.
What is bankruptcy
Bankruptcy is the inability of an enterprise to pay its debts. The probability of a crash, despite the unpredictability of the market, can be predicted in a few months. To do this, assess the likelihood of bankruptcy. Since in order to determine the cause of financial instability, it is necessary to use a large amount of information, the forecast is made in several stages.
First, an analysis of financial stability. If the indicators were in a deplorable state, it is necessary to conduct additional research and determine the risk of the complete insolvency of the enterprise. For this, forecasts are made using various bankruptcy models.
Signs of Bankruptcy
An enterprise cannot go bankrupt in one moment. This is usually preceded by a protracted financial crisis. The market is designed in such a way that there are both ups and downs. The manufactured products cannot be sold, revenue is reduced. A crisis may arise through the fault of company executives. Improperly developed trading strategy, unreasonably high costs, including on loans. The company will not be able to pay creditors on time, pay taxes and fees. Signs of impending bankruptcy are:
- decrease in profitability;
- decrease in liquidity;
- decrease in profit;
- growth in receivables;
- decrease in business activity (turnover of funds).
For analysis using reporting data for 2-3 years. If the above symptoms are observed during the entire observation period, then there is a risk of bankruptcy. But for the picture to be complete, this information is not always enough. An enterprise may have a large margin of safety and maintain financial stability for a long time, despite negative factors. Therefore, if the analysis of the financial condition showed negative dynamics, it is necessary to conduct an additional assessment of the probability of bankruptcy.
Assessment of financial stability of the enterprise
Under the general financial stability refers to such a movement of funds in which there is a constant increase in income. There are enough of them not only to pay off all debts, but also to reinvest. An enterprise cannot develop and operate stably if there is no updating of the material and technical base, growth of labor productivity and output.
Violation of financial stability is the first step towards a probable bankruptcy. If the amount of assets is insufficient or they are difficult to realize, it will not be possible to cover arising debts in the near future. It is the analysis of assets, their structure and value, that underlies the construction of the Fox model.
Types of analysis
In the practice of analysis, there are 4 types of financial stability. But only with two of them an additional analysis of bankruptcy is carried out, using various models to predict the likelihood of collapse more accurately.
- Absolute stability. This condition is characterized by the fact that the company has enough of its own sources of funds to form stocks and pay off debts to personnel, tax authorities and suppliers.
- Normal stability. The company does not have enough of its own funds, and it attracts long-term loans as a source for the acquisition of current assets. Moreover, it is able to pay loans on time and in full. The amount of receivables is small.
- Unstable state (pre-crisis). It remains possible to maintain the enterprise through short-term loans and borrowings. Easy-to-sell assets are not enough to fully repay debts. The proportion of difficult to implement in the balance is high.
- Crisis financial condition. The company can no longer pay its bills. There are very few easily traded assets. There is low profitability and liquidity, a decrease in business activity. Easily marketable assets, and especially money, are not enough to cover debts. The company is actually on the verge of bankruptcy.
Currently, in the methodology for analyzing the financial condition, there are two methods of assessment: based on the balance sheet method and based on the method of financial ratios.
What methods are used
The following are data that are used in determining the type of financial stability.
Table 1: data for calculation
Indicators | 2014 | 2015 | 2016 |
Working capital (SOS) | 584101 | 792287 | 941089 |
Functioning Capital (CF) | 224173 | 209046 | 204376 |
Total number of sources of financing (VI) | 3979063 | 4243621 | 4462427 |
Total inventory and costs (RF) | 77150 | 83111 | 68997 |
All of these data are taken from the financial statements of the enterprise. They are indicated in the balance sheet and income statement.
Features of the method used
The coefficient method shows how the company is provided with easily tradable assets to maintain a stable state and development. The table below shows the calculations performed for the enterprise:
Table 2: Coverage Ratios
Index | Calculation algorithm | 2014 | 2015 | 2016 | Optimal value |
Equity Guaranteed Ratio | SOS / ZZ | -7.6 | -9.5 | -13.6 | ≥0.8 |
Ratio of guaranteed coverage with funds taken on credit on a long-term basis | FC / | -1.9 | -1.5 | -2 | ≥1 |
Guaranteed coverage ratio for long-term, medium-term and short-term loans | VI / | 51 | 51 | 64 | ≥1 |
All the calculations in the table are easily performed on a computer in a spreadsheet program.
What do the calculations say?
As you can see, the organization has problems with providing cash. She lacks her own easily tradable assets. At the same time, the enterprise has a sufficient margin of safety so that a shortage of easily tradable assets does not lead to bankruptcy. A large number of sources of financing give it stability. But there are some problems with debt repayment in the short and medium term. The situation is getting worse every year.
Since the analysis showed that the company is in an unstable or crisis state, it is necessary to conduct additional research. In the course of these studies, calculations and models are built. A bankruptcy forecast with an accuracy of several days will fail. It depends on a lot of factors. But to determine whether the company faces collapse in the near future and take action in time is entirely possible.
Fox model
The Fox model is a four-factor model for predicting the probability of bankruptcy of an enterprise. The formula of the Fox model used to calculate the probability is presented below:
R = 0.063 * K 1 + 0.692 * K 2 + 0.057 * K 3 + 0.601 * K 4.
How are the coefficients calculated and the Fox model constructed? An example of calculation is shown in table 3.
Table 3: Fox Model
No. | Article title | 2014 | 2015 | 2016 |
1 | Current assets | 274187 | 254573 | 389447 |
2 | Total assets | 4340106 | 4587172 | 4846744 |
3 | Amount of all received loans | 321221 | 352311 | 450023 |
4 | retained earnings | 24110 | 1740 | 4078 |
5 | Market value of equity | 3481818 | 3540312 | 3516208 |
6 | Profit before tax | 24110 | 1740 | 4078 |
7 | Profit from sales | 64300 | 39205 | 47560 |
eight | K1 (item 1 / item 2) | 0.063175 | 0,055497 | 0,080352 |
nine | K2 (item 7 / item 2) | 0.014815 | 0,008547 | 0.009813 |
ten | K3 (Clause 4 / Clause 2) | 0,005555 | 0,000379 | 0,000841 |
eleven | K4 (Clause 5 / Clause 3) | 10,83932 | 10,04883 | 7,813396 |
12 | R value | 6,528982 | 6,048777 | 4,707752 |
13 | Estimation of R values: <0.037, bankruptcy likely > 0.037, bankruptcy will not occur | Will not come | Will not come | Will not come |
The enterprise bankruptcy forecasting model R. Lisa shows that the company is not facing bankruptcy. At least in the coming year. However, its financial condition is unstable, there are not enough funds to cover short-term debts.
The advantage of such a bankruptcy model is that all indicators of economic activity are evaluated in terms of asset availability. Regardless of whether this item is revenue or expense. The sum of assets is what the enterprise consists of. The more assets and the higher their liquidity (ability to turn into money), the more stable it is.
What other forecasting models are there?
In addition to the Fox model, there are many more different estimation methods. In some of them, overestimated coefficients are used, in others - underestimated ones. In many respects, the application of one or another depends on the type of activity of the company, the general state of the economy and the accounting rules adopted in the country.
Different models give different results. The main differences between them are not only in the calculation formulas, the number of factors taken into account, but also in what data is compared. If we compare, then the Fox model most accurately shows the financial condition of the enterprise. It is based on an assessment of the ratio of current assets and the total balance sheet (assets). It is assumed that all assets of the enterprise can be used. This approach gives a more complete picture of whether it is possible to restore the normal operation of the company or whether bankruptcy is inevitable.
What to do if the model showed a negative outlook
If the outlook turned out to be negative and the risk of bankruptcy is great, then the first thing the company management should do is find a way to stabilize the financial condition of the company, increase the profitability and liquidity of assets. This should be done not only by attracting borrowed funds, but also by selling unused capacities or putting them into operation. Timely analysis and assessment of the probability of bankruptcy gives time to take rescue measures.
To make a forecast and build a model of probable bankruptcy is the task of not only the managers of the enterprise, but also suppliers. They must be sure that the company is able to pay its debts, and is not on the verge of collapse.
The consequences of bankruptcy
Until the insolvency of the enterprise is recognized by the arbitration court, the legal entity is not bankrupt. If the debtor's obligations have not been repaid within 3 months from the day of delay or the amount of debts exceeds the cost of the property belonging to him, then it shall be considered insolvent. The court appoints a check, and if it is confirmed that the company is not able to pay the bills, then a bankruptcy procedure is carried out. After that, the sale of property begins. The funds received are used to repay liabilities to creditors and tax authorities.