Examination of accounting and financial information enables the assessment of economic performance

The approach is based on an examination of accounting and financial information and is intended to assess as objectively as possible the economic performance and the company’s ability to meet its commitments.

It is important to know that a company is considered legally solvent if its assets enable it to repay its debts.

By contrast, insolvency is the state of cessation of payments; in this case, other elements should be considered such as non-financial risks.

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

Controlling insolvency risk through financial analysis

This overall knowledge aims to formulate a diagnosis in order to control the risks and parameters in decision-making. Because in the management of customer or supplier positions, any business failure* is considered likely to lead to chain reactions:

Loss of confidence
Bank credit reduction
Balance sheet deposit

On long-term contracts, the analysis provides an opportunity to review the key points of the sustainability of a relationship, taking into account financial, legal and operational impacts.

The analysis of the financial statements is carried out by:

the study of growth, turnover, productions sold, stored, immobilized…
analysis of profitability and changes in results by nature (operational, financial, exceptional) and intermediate management balances compared to sector averages
the assessment of the exercise’s self-financing capacity to assess the company’s ability to self-finance its operating cycle and generate wealth to repay its loans and loans, finance its investments, pay 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 requirements.

Risk assessment, a human decision

However, highlighting vulnerability or threat does not automatically mean rejecting the entry into or delivery of the product. The whole question for the credit manager or the purchasing manager lies in the assessment of the likelihood of incidents before the end of the contracts. Difficult decision-making…

* openings for judicial reorganization or direct judicial liquidation.