Diagnostic of Company's Financial Crisis as an Insolvency Prevention Measure

Abstract

Currently, the issues of insolvency and optimal financial situation of companies become increasingly topical. Simultaneously the company's crisis management with all its elements, including crisis diagnostics, have not been sufficiently studied yet. The object of the research is company's financial crisis diagnostics, the subject-methods of company's financial crisis diagnostics. The aim of the study-to carry out theoretical analysis of the company's financial crisis diagnostics in the view of insolvency prevention-is achieved applying monographic or descriptive research method, comparative analysis methods, as well as employing qualitative, grouping, and graphical methods. As a result of the research, the authors have concluded that a status of company's insolvency, which can be characterized by the company's inability to perform its commitments and by predominance of the company's liabilities over its assets, is the last and the most severe stage of financial crises, mostly deriving from a long-term reluctance by the management to react to the current financial crisis in the company. Thus, one of the company's insolvency prevention options shall be timely detecting of symptoms of the company's financial crisis in its early stages-that is a priority objective of the crisis diagnostics. Crisis diagnostics is a systematic application of a several different (usually financial) models to assess the company's status and to identify possible symptoms of the crisis. Early detection of the crisis indications significantly increases possibilities of saving the company's assets.

Financial Diagnosis Methods. Bankruptcy Risk Assessment for Retail Companies in Brasov

“…A study on the financial situation of companies before entering insolvency proceedings showed that, after analysing a set of indicators, most companies that were part of the study had poor and very poor results before this process (Schönfeld, 2020). The study concluded that financial rehabilitation should be done much earlier than two or three years, thus strengthening the research conducted by Mietule & Klodaāne (2016).…”

“…An approach to financial diagnosis can also be formulated in relation to insolvency issues that are increasingly current, especially since topics such as crisis diagnosis with all its elements are not yet sufficiently studied. Thus, the diagnosis must be systematically subjected to several methods of comparative analysis, as well as to qualitative use, grouping and graphical methods (Mietule & Klodaāne, 2016).…”