As of May 2022, the new Business Crisis Code will come into effect: it will be crucial for entrepreneurs to know and keep track of business crisis indexes.
In this article we look at what indexes to check to prevent business crisis and how to do so through the use of IT solutions: financial statement analysis and management control software.
What are the indices of business crisis?
Business crisis indices are useful parameters for the entrepreneur and management of a company, of any commodity sector, in order to have a realistic representation of the present and future asset, income and financial situation.
The objective is the prediction of debt sustainability as well as the existence of corporate tightness compared to the present situation.
Index analysis allows the company's situation to be assessed; if a certain threshold is exceeded, there is a possibility of a crisis taking place.
The crisis indices common to all enterprises are:
- Net worth;
- The Debt Service Coverage Ratio (DSCR).
- The Sectoral Indices.
To keep track of their progress, it is essential to use budget analysis software.
Net worth of the enterprise
Among the indices of enterprise crisis, the first to be analyzed is the enterprise's net worth. In case it is negative or below the legal minimum, the enterprise is presumed to be in a state of crisis. Otherwise, recapitalization could be resorted to.
This index should be checked by looking at the "net worth" item, where the balance sheet liabilities are shown.
Regardless of the financial situation, negative equity assumes a lack of prerogative for going concern.
Debt Service Coverage Ratio (DSCR)
DSCR is an index that is obtained by calculating income and expenditure in the form of expected cash in the next six months. It represents the company's ability to be able to honor its medium- to long-term debts.
The calculation of DSCR can give two responses:
- Earnings less than 1: Cash flow from operations is insufficient to meet financial commitments to service debt. The enterprise is found to be in a reasonable presumption of distressed status.
- Earnings greater than 1: Cash flow from operations is sufficient to meet debt service financial commitments.
The DSCR can be used only when there is prognostic data that is not deemed unreliable by the regulators.
The estimation of the prognostic figure is in fact the responsibility of the delegated administrative body. A cash flow forecast is needed to control the DSCR.
Sectoral indices
If the DSCR is not available, the thresholds for the sectoral indices must be jointly exceeded. In fact, the regulations require the use of the other indicators when the DSCR is not present or is considered unreliable.
The sector indexes are the result of a development by the Certified Public Accountants and the National Council of Certified Public Accountants. They are as follows:
- Financial expense sustainability index: this is obtained from the difference between financial expenses and revenues. Interest is assigned to the numerator while net revenues are assigned to the denominator.
- Capital adequacy ratio: should be calculated as the ratio of total debt to equity, which go to the nominator and denominator, respectively.
- Asset liquid return index: they consider cash flow, which is indicated by the non-cash costs and assets of the entire assets, considering the present time frame.
- Liquidity index: all assets and liabilities over the short term should be considered.
- Social security and tax debt ratio: represented by debts arising from taxes and social security owed to social security and welfare institutions, and the total figure representing the assets of the entire estate.
What the new Business Crisis Code says.
The new Business Crisis Code(Legislative Decree Jan. 12, 2019, No. 14) changes the approach of entrepreneurs to a crisis.
The code was to go into effect in September 2021, but was postponed to May 2022.
The goal of the reform is to try to prevent the emergence of a crisis from being perceived too late, when it is no longer possible to intervene because the crisis is now irreversible. The code defines tools to enable early verification of the state of enterprises.
Among the new features in the code are:
- Detailed warning system that enables early warning of the onset of a crisis;
- Alternative procedures to judicial execution;
- Leaner, simpler and cheaper competitive procedures;
- Employee protections are held in high regard when managing a crisis.
Balance sheet analysis for monitoring business crisis
Keeping indexes under control is essential to prevent a crisis state. The use of software allows for easy and accurate control.
The Balance Sheet Analysis software allows for the verification of financial equilibrium and the assessment of business continuity also from a forward-looking perspective, as provided by the new Crisis Code.
Allows you to reprocess accounting data from multiple fiscal years, generating reports rich in text, indexes, tables and charts. Also includes management of business crisis indexes, allowing you to be compliant with the provisions of the new code.
Through this software it is therefore possible:
- Compare different periods
- Have reclassification statements according to different criteria
- Obtain prospectuses on the company's financial situation
- Monitor indicators and margins
Management control: making the best operational and strategic decisions
Financial statement analysis is a part of enterprise control. Management control provides insight into business reality, helping to make the best operational and strategic decisions.
Thus, it is a process of collecting, analyzing and disseminating useful information; it provides feedback, guides and directs the management of the company.
By collecting and analyzing data from a variety of business sources, it enables the analysis of economic resources and an understanding of how to deploy them to achieve operational goals.
The use of management control software makes it possible to:
- Process data to attribute direct and indirect costs to individual revenues
- Vary the parameters for calculating direct costs
- Create dynamic forecasts that consider budgets and business trends
- Produce analyses with the information needed for analytical and predictive control
Prevent the state of crisis by keeping an eye on the business situation
Check ratios and margins through budget analysis and understand how to manage your business resources through management control. Contact us for a cognitive meeting: we will introduce you to our solutions!
