Early Warning Analysis of Financial Risks of Small and Medium-sized Enterprises

Early Warning Analysis of Financial Risks in Small and Medium-sized Enterprises

Small and medium-sized enterprises in order to avoid falling into a financial crisis or even bankruptcy, should establish a good financial risk early warning system, tracking and monitoring the operation process of the enterprise's finances, and discovering the signals of financial crises at an early stage and carrying out early warning processing, which is of great significance to the stakeholders such as the operator, investor, creditor, and the government. Below I have organized for you to analyze the financial risk early warning of small and medium-sized enterprises, welcome to read and browse.

1 small and medium-sized enterprise financial risk early warning system of the theoretical meaning

A large number of cases show that many companies caught in the operational crisis is to appear as a precursor to the financial crisis, for the prevention of financial risk, a relatively new concept is the financial risk early warning system. Financial risk early warning system is a risk control system, which uses timely data management, based on the enterprise's financial statements, business plans and other relevant accounting information, the enterprise's assets, liabilities and other analysis and prediction, in order to find small and medium-sized enterprises in the operation and management activities of the financial risk, and in the crisis before the occurrence of the financial indicators in the form of data to the business operators to issue a warning, urging the The management of the enterprise to find the causes of financial risk, to take effective countermeasures, to prevent the problem before it occurs.

Simply put, the financial risk warning mechanism for small and medium-sized enterprises is the full application of the existing information technology system, set up and observe the changes in some sensitive financial indicators, and realize the prediction of the financial crisis that the enterprise or the group may or will face, and at the same time, through the operation of the information system, analyze and forecast the information and make timely and effective treatment of an early warning system .

2 SME financial risk early warning system function

SME financial risk early warning system function mainly has the following four aspects: monitoring function, diagnostic function, corrective function and immune function. The first two functions are the basic functions of the financial risk early warning system, and the last two functions are its derivative functions.

2.1 Monitoring Function

The basic function of financial risk early warning system is to alert and prevent risks in advance. Monitoring is through the tracking of the whole process of production and operation of the enterprise, the actual situation of production and operation of the enterprise and the enterprise predetermined goals, standards, plans for comparison, the business situation of the enterprise to make predictions, to find deviations, accounting and assessment, so as to find out the reasons for the deviation or the existence of the problem. When there are key factors that may jeopardize the financial situation of the enterprise, the financial early warning system can issue a warning in advance to remind the operator to prepare and take countermeasures. When the key factors that jeopardize the financial situation of the enterprise appear, can put forward a warning to remind business operators to seek early countermeasures to avoid the occurrence of risk or reduce the degree of loss.

2.2 Diagnostic function

Diagnostic function is also one of the important functions of the early warning system. According to the results of tracking, monitoring and comparative analysis, the use of modern enterprise management technology, enterprise diagnostic technology to find out the causes of the deterioration of the financial operation of the enterprise, as well as the shortcomings in the operation of the enterprise and its root causes.

2.3 Corrective function

Through monitoring and diagnosis, to determine the financial problems of small and medium-sized enterprises, and find out the root cause of the disease, we can prescribe the right medicine to correct the deviation or fault in the process of enterprise financial management in a timely manner, so as to bring the enterprise operation back to the normal track. Once a financial crisis occurs, the operator will be able to prevent the financial crisis from continuing to deteriorate.

2.4 Immune function

That is, the preventive function, through the early warning analysis, small and medium enterprises can systematically and in detail to record the causes of financial risks, processing, to resolve the crisis 'measures, as well as feedback to get the improvement of the proposal as a reference to similar situations in the future. In this way, SMEs will be able to correct deviations and faults of some of the experience, lessons learned into the norms of business management activities, to avoid the same or similar errors occur again, and continue to enhance the SMEs' own immunity.

3 SME financial risk early warning construction

3.1 SMEs to establish a financial risk early warning system feasibility analysis

Enterprises to take any measure, we need to conduct a feasibility analysis. The establishment of a financial early warning system is an important element of the financial management of small and medium-sized enterprises, and even more so, there can be no lack of feasibility analysis.

The establishment and healthy operation of the financial risk early warning system is inseparable from the enterprise's perfect organizational management system and integrity of the strong support of the corporate culture. Perfect organizational management system is the risk of early warning system can be effectively run after the establishment of the premise. Integrity of the corporate culture is the risk warning system to forecast the real financial risk warning information to ensure.

(1) a relatively perfect organizational management system has been initially established. China's small and medium-sized enterprises in the baptism of the market competition after many years, its managers have realized the importance of strengthening the internal organization and management of enterprises to improve competitiveness. Managers have to strengthen their own learning to improve the modern management level of enterprises; the introduction of professional managers, standardized management of enterprises, the establishment of a sound internal management system; some enterprises are through the introduction of the international quality management system to enhance the internal management level of enterprises. It can be seen that a relatively perfect organizational management system has been initially established. All of this will provide protection for the effective operation of the financial risk warning system.

(2) internal information technology has been more widely used. At present, China's small and medium-sized enterprises have been widely used to improve and strengthen the internal management of enterprises through information technology. The implementation of information technology internal management of small and medium-sized enterprises for the establishment of financial risk warning system provides a platform for timely delivery of early warning information.

(3) integrity of the enterprise culture has been established. China's small and medium-sized enterprises to build ? To establish business in good faith, to do business in good faith? The enterprise culture helps to improve the authenticity and accuracy of the early warning information, which in turn ensures the scientific nature of the early warning decision-making process.

3.2 The establishment of SMEs financial risk early warning system

The establishment of an effective financial risk early warning system is a powerful measure for SMEs to avoid financial risks. The establishment of financial risk early warning system for small and medium-sized enterprises mainly consists of the following:

3.2.1 Define the causes and types of financial risk, determine the scope of early warning

The premise of the establishment of financial risk early warning system for small and medium-sized enterprises is to define the causes and types of financial risk to determine the scope of early warning. From China's small and medium-sized enterprises in the environment and the enterprise's own situation, the causes of financial risk are mainly two forms of expression: First, financing risk, that is, the enterprise in the case of the income does not meet the expenditure of the risk of not being able to repay the debt principal and interest in a timely manner; the second is the cash flow risk, that is, in a particular day, the cash outflow exceeds the cash inflow generated by the due date of the debt can not be repaid the risk of the principal and interest. Therefore, for China's small and medium-sized enterprises, the main financial risks to be prevented are financing risk and cash flow risk. Of course, we can not ignore the investment risk, capital recovery risk, guarantee risk, price risk and exchange rate risk control and prevention.

3.2.2 Establishment of financial risk early warning indicator system to realize the financing risk

Early warning SMEs to establish a set of indicators to carry out financing risk early warning. Financing risk early warning to combine the unique development characteristics of China's small and medium-sized enterprises and the current situation of financial risk, by analyzing the relevant financial indicators. Generally speaking, can be from the solvency, profitability, asset operating capacity, enterprise development potential and financial structure of the five aspects to establish the early warning indicator system, as shown in Table 1.

It should be noted that, although the above indicators can predict the financing risk, the enterprise occurrence of financing risk is mainly due to debt. For China's small and medium-sized enterprises, equity financing is often restricted, so most of the use of debt financing, the proportion of debt capital is higher, so in the use of the above indicators to analyze the early warning at the same time, but also should be the return on debt operating assets and the cost of debt capital ratio comparison, only the latter is less than the former, in order to ensure that the maturity of the return of principal and interest to achieve the financial leverage gains, to avoid the risks arising from the large-scale borrowing. avoiding the risks arising from large-scale debt raising. At the same time, it should also consider the reasonable degree of allocation of debt capital among various projects, and the main assessment indicators are the retained earnings ratio of assets, the ratio of long-term liabilities to working capital, and the debt-to-equity ratio. Only by determining a reasonable debt ratio and forming a reasonable capital structure can SMEs improve their ability to withstand financial risks and promote their own balanced and sound development.

3.2.3 Strengthen cash management and realize cash flow by preparing cash flow budget

Risk early warning cash is the most important liquid assets of the enterprise, even if it is a profitable enterprise, if it does not have enough cash to pay, it may also fall into financial crisis. Small and medium-sized enterprises (SMEs), which are greatly affected by the economic environment, tend to be weak in their own fund-raising ability, and the use of funds is affected by factors such as the lack of cash budgets and effective management, which can easily lead to the formation of cash flow risks. In order to prevent this risk, SMEs should realize the short-term financial risk early warning through the preparation of cash flow budgets, rational scheduling of funds, accelerating capital turnover, and strengthening cash management.

In order to realize the dynamic management of cash, small and medium-sized enterprises should express the cash flow, expected future earnings, financial position and investment plans in a quantitative form, establish a comprehensive budget, predict the future cash flow situation, and establish rolling cash flow budgets for a period of weeks, months, quarters, half a year and a year. Since the actual production and operation process will occur due to the uncertainty of the enterprise's business activities and a variety of circumstances, so the cash flow budget and the actual situation will produce a certain difference. In order to ensure the effective implementation of the budget system, small and medium-sized enterprises should carry out full tracking and supervision of the implementation of the budget, and constantly adjust the implementation of deviations to ensure the realization of the budget target. In addition, cash management is only a kind of behavior, and ultimately have to be reflected in the enterprise's financial statements. SMEs should pay special attention to sensitive indicators such as cash holding ratio, cash shortage rate, operating cash ratio and other early warning of the cash situation, in order to timely understand and grasp the status and extent of the enterprise cash flow risk.

3.2.4 Combined with the actual situation of the enterprise to set up the critical value of early warning indicators

The critical value of the financial early warning system, refers to the normal operation of the enterprise, the relevant indicators can not break through the value of the critical area. The critical value is a quantitative standard for judging financial risks, and the determination of the critical value is the most critical part of the early warning system. As small and medium-sized enterprises are located in different industries, even in the same industry its scale of operation is also different, the critical value of its financial risk early warning will naturally be different. Therefore, the determination of the critical value of financial risk early warning can not simply be based on an industry? Average value? to replace. In the process of determining the critical value of early warning, enterprises should consider the following factors: the historical level of the enterprise, the average profit level of the same industry, the existing profit level of the industry's outstanding enterprises, the enterprise's own long-term planning goals, etc., and accordingly determine the critical value of the enterprise's own characteristics. In addition, in determining the critical value, but also reflect the policy and scientific, to pay attention to the overall and coordination, to ensure adjustability and stability.

3.2.5 Early Warning Signal Alarm and Processing Mechanism

In the daily financial risk management, the enterprise should regularly or dynamically compare the early warning indicators with the critical value, and if the early warning indicators are close to or break through the critical value, the alarm should be issued according to the specific situation, and the allocation of the enterprise's financial resources should be controlled in time through the change of the control parameters and variables of the financial system so that the abnormal change of the enterprise's financial situation can be controlled, and thus the enterprise's financial situation can be improved. The abnormal changes in the financial situation of the enterprise can be controlled, so that the changes in the financial situation of the enterprise can always run in a reasonable confidence interval.

Small and medium-sized enterprises can set up a financial risk alarm system to realize the alarm forecast. In the case of early warning indicators exceeding the critical value of the alarm issued, notified to the relevant departments and individuals. Alarm mode can be diversified, such as with indicator lights: red? Huge alarm; yellow? In the police; blue? Light alarm; green? No alarm, etc., can also use different sounds to indicate the degree of danger. Financial risk alarm issued, the enterprise should immediately issue financial risk control instructions, take appropriate measures to reduce the risk of loss. If the financial risk of an enterprise is always great, it will threaten the life of an enterprise. Enterprises want to get rid of the adverse impact of financial risk to the enterprise, it is necessary to formulate a pre-processing program in advance, so as to weaken the negative impact of the risk, and even can be eliminated or avoided similar financial risks occur again.

3.3 SMEs to establish a sound financial risk early warning mechanism supporting measures

Financial risk early warning mechanism for the enterprise crisis prevention provides a guarantee, but the financial risk early warning mechanism to really play a role in the establishment of the following measures must be taken to improve and ensure that the implementation of the financial risk early warning mechanism of small and medium-sized enterprises.

(1) establish the concept of risk prevention, strengthen the awareness of risk warning. To establish the concept of risk prevention and awareness of the enterprise financial early warning mechanism to successfully establish and effectively run the premise. Therefore, small and medium-sized enterprise senior management should continue to improve their management level, strengthen the awareness of risk warning, strengthen risk management, to make financial management personnel understand that financial risk exists in all aspects of financial management work, any link of the work of the error may bring financial risk to the enterprise, financial management personnel must be risk prevention concept throughout the financial management work, in the mind of the potential for Crisis to maintain a clear understanding and a high degree of vigilance.

(2) Improve the internal control system to ensure the implementation of financial risk warning mechanism. Financial risk early warning is based on accurate and real internal and external information data, effective internal control system can ensure that on the one hand, the orderly management of the enterprise, financial data security and reliability, on the other hand, can provide accurate first-hand information for the early warning, so that the top management of the enterprise in a timely manner to grasp the real and reliable information on financial activities, and the received warning signals to make the corresponding countermeasures, the financial warning Really put into practice. At present, a large part of China's small and medium-sized enterprises lack an effective internal control system, such as cost accounting, financial inventory, financial income and expenditure and other basic systems are not sound, or the basic system is sound but not seriously implemented. Therefore, in order to ensure the real implementation of the risk early warning system, small and medium-sized enterprises must establish and improve the enterprise internal control system, the construction of a full range of internal control system, plugging the loopholes, eliminating hidden dangers, preventing risks, and prudent management. Only in this way can ensure the effective operation of the financial risk warning mechanism of the enterprise.

(3) Continuously strengthen the training of talents and improve the business quality of financial personnel. As most of the data in the risk warning model comes from financial accounting data, the real integrity of the financial data is the basic premise of the implementation of the risk warning mechanism, so the quality of the financial staff to a certain extent determines the success of the implementation of the early warning mechanism. Most of China's small and medium-sized enterprises have a flexible business mechanism, so the financial management methods are also flexible and diverse. However, it is difficult for small and medium-sized enterprises to attract the required talents, resulting in a lack of excellent financial management personnel. At the same time, most of China's small and medium-sized enterprises, corporate decision-making power is overly centralized, simple procedures, no rules to follow, unclear management behavior boundaries, financial managers are poor to cope with day-to-day affairs and lack of sufficient time to learn and apply advanced financial management techniques; financial personnel quality is poor, business skills are not good, can not master the modern management methodology, the lack of information processing, analytical skills. Therefore, small and medium-sized enterprises should establish the appropriate personnel training and re-education system, through training and external exchanges to continuously improve their business processing capabilities and information processing and analysis capabilities, enhance their professional learning ability to further improve their business standards.

(4) Focus on the combination of quantitative and qualitative methods to ensure the accuracy of financial risk prediction. Quantitative prediction in financial risk early warning analysis is indeed very necessary, but the importance of quantitative models can not be overemphasized. It is true that financial statements are the main source of early warning indicators, but sometimes the occurrence of financial risks cannot be shown only by the data on financial statements. Therefore, in the prediction process, SME finance staff in the quantitative models and indicators for analysis at the same time, should also be combined with such as customer satisfaction, employee morale and other non-quantitative factors, and even rely on the experience and intuitive judgment of the analysts to make a qualitative analysis and evaluation, for example, when the enterprise appears to be overly reliant on loans, excessive large-scale expansion, a sharp decline in total assets and earnings, and the enterprise's share price fell sharply, and so on. It is a sign of the possibility of financial risk. Only by combining quantitative analysis with qualitative analysis can we accurately forecast financial risks and nip them in the bud.

Main References

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