Are you struggling with your cash flow? Has your bank refused to lend you any more money? Are your partners or shareholders no longer willing to infuse fresh capital into your business? Have your vendors stopped extending you credit? Your answers to these questions will help you determine if your company is headed for bankruptcy.
There is yet no bankruptcy law in the Philippines, so the practice is for losing companies to request the court to order a suspension of debt payments. Normally, the court is the one that decides – based on the recommendation of a third party receiver – whether a company should be liquidated or rehabilitated. Rehabilitation requires the company to re-organize itself to improve its operations and increase its cash flow. It is normally the option most companies – unless opposed by their creditors – opt for.
RUN THIS TEST
The Altman Z Test accurately measures the probability of a company going bankrupt. Developed in 1968 by Edward I. Altman, the test uses five financial ratios that are weighted and added to arrive at an overall score. These ratios are working capital to total assets, retained earnings to total assets, earnings before interest and taxes (EBIT) to total assets, market value equity to book value of total debt, and sales to total assets.
Altman Predictor Model
A EBIT/Total Assets 3.3
B Net Sales/Total Assets 0.999
C Market Value of Equity/Total Assets 0.6
D Working Capital/Total Assets 1.2
E Retained Earnings/Total Assets 1.4
Z-Score = (A x 3.3) +(B x 0.999) + (C x 0.6) + (D x 1.2) + (E x 1.4)
This is how you determine your financial standing:
• A Z-Score of 2.99 and higher means your company is safe.
• A Z-Score between 2.7 and 2.99 means you should watch out as your finances could get worse.
• A Z-Score between 1.8 and 2.7 means your company may go bankrupt in two years if you don’t do anything to improve your situation.
• A Z-Score of less than 1.8 means you’re on the brink of financial collapse.
Unfortunately, many small businesses do not bother finding out their Z-Scores because they don’t have reliable financial data to start with. Most do not have audited financial statements but rely on bank transaction records to keep track of their cash flow.