The review of accounting and financial information allows the assessment of the economic performance

The approach is based on a review of accounting and financial information. Its purpose is to assess as objectively as possible the economic performance and the capacity of the company to meet its commitments. It is important to know that a company is legally solvent if its assets are sufficient to repay its debts.

In contrast, insolvency is the state of cessation of payments. In this case, other elements are to be considered such as non-financial risks.

Indeed, a company can be in excellent financial health and still be fragile due to uncontrolled risks such as dependence on a single customer or supplier.

 

Controlling insolvency risk through financial analysis

The purpose of this global knowledge is to formulate a diagnosis in order to control the risks and parameters in the decision-making process. Because in customer or supplier item management, any company failure* is considered likely to lead to chain reactions:

  • Loss of confidence
  • Shortage of bank credit
  • Filing for bankruptcy

For long-term contracts, the analysis allows us to review the key points of the durability of a relationship, taking into account the financial, legal and operational impacts.

Financial statement analysis is performed by :

  • The study of growth, turnover, production sold, stored, immobilized...
  • Analysis of profitability and changes in results by type (operating, financial, exceptional) and intermediate management balances compared with sector averages
  • The evaluation of the self-financing capacity of the financial year to assess the ability of the company to self-finance its operating cycle and to generate wealth to repay its loans and borrowings, finance its investments and remunerate its shareholders
  • The change in the company's operating cash flow in the short, medium and long term, with the measurement of solvency and financing needs.

 

Risk assessment is a human decision

However, the identification of vulnerability or threat does not automatically mean the rejection of the relationship or the delivery of the product. The question for the credit manager or the purchasing manager is to assess the probability of incidents before the end of the contracts. A difficult decision to make...

 

*opening of receivership or direct judicial liquidation.