How To Establish Financial Risk Early Warning System

< p > > a href= "http:// www.sjfzxm.com/news/index_c.asp" > financial risk < /a > early warning system is based on the enterprise's financial statements, business plans, development strategies and other related accounting information, using the theory of accounting, finance, enterprise management and so on, using mathematical modeling method to set up and observe a series of changes in sensitive early warning financial indicators, and timely supervise, track and analyze the production and operation activities and financial activities of enterprise groups. Once the potential financial risks in enterprise activities are discovered, the warning system will alert operators to take effective preventive measures before dealing with risks.

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< p > first, implement cash flow control management and realize short-term financial risk early warning function.

Secondly, we should establish early warning financial index system and establish a long-term financial risk early warning system.

To set up a long-term financial risk early warning system for enterprises, we should take into account the financial indicators of the group and make different a href= "http:// www.sjfzxm.com/news/index_c.asp" > measurement indicators < /a > according to the differences existing in different industries.

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< p > we can introduce the famous Z finance < a href= "http:// www.sjfzxm.com/news/index_c.asp" > warning model < /a > for risk early warning.

By analyzing the financial data of 33 bankrupt companies and 33 non bankrupt companies for 5 years, the US economist Edward.Altman chose 22 categories of financial indicators, namely, liquidity, profitability, profitability, capital structure and turnover capacity. Five indicators were selected through regression analysis, and the Z financial early warning model (Z-score Model) was established.

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< p > Z=0.012 (X1) +0.014 (X2) +0.033 (X3) +0.006 (X4) +0.999 (X5) < +0.999 >

< p >: X1= working capital / total assets; X2= retained earnings / total assets; X3= pre tax profit / total assets; X4= equity market / debt book price; X5= sales revenue / total assets.

The first four indicators are substituted by percentage.

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< p > this model can be interpreted as an indicator X1 and X4 represent the solvency of enterprises. Indicators X2 and X3 represent the profitability of enterprises. The index X5 represents the operation capability of enterprises and brings the above indicators into the company's actual data. The Z value can be used to analyze and predict whether the company will face the crisis of bankruptcy.

The lower the Z value, the greater the probability of business bankruptcy.

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< p > Altman through the observation of the test results, it is found that the enterprises whose Z value is higher than 2.99 are all non bankrupt enterprises, and the enterprises whose Z value is less than 1.81 are all failed in operation. In the 1.81 to 2.99 "grey area", the situation of the enterprises is more difficult to predict, and through the further observation, the Altman finally chooses 2.675 as the critical value.

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< p > but after years of research by Chinese scholars, considering the difference between China and the United States, the macroeconomic data, accounting system and accounting information authenticity are different, and so on, and put forward a threshold value of 1.1061.

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