Abstract
Risk is intrinsic to each company, and threats can come unexpectedly. Over the past few years, the strict interaction between crisis management (CM) and risk management (RM) has become particularly relevant for small and medium enterprises (SMEs), which have experienced severe difficulties in dealing with crises (e.g. coronavirus pandemic). Most of those companies have no approach or a rudimentary approach to crises, and only a few prevent insolvency or bankruptcy in a timely manner. Accordingly, it is crucial to develop an RM approach that can adapt to the specific characteristics of SMEs and that considers both financial information and non-financial information as early warning indicators of a crisis. Each SME needs to follow a coherent, logical and integrated process to determine if there are liquidity problems and the stage of the financial distress, thus considering a set of indicators as integrated with the risk analysis concerning the business environment, risk mitigation strategies and responses. Therefore, this chapter proposes the integration between risk management process and the most relevant key financial early warning indicators used by practitioners and default prediction models.
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Notes
- 1.
In 2016, 15 organizations from seven European Member States formed a partnership to develop Early Warning Europe as a project organization under the call “European Network for Early Warning and for Support to Enterprises and Second Starter” within the EU COSME programme. The call was an integral part of the European Commission’s efforts to improve framework conditions for SMEs and entrepreneurs across Europe.
The project succeeded in implementing the early warning mechanism in four countries (Greece, Italy, Poland and Spain) on the bases of previous experience from Belgium, Denmark and Germany. Partners from six new countries (Croatia, Finland, Hungary, Lithuania, Luxembourg and Slovenia) joined in 2019 with the aim of launching their own national early warning mechanisms. An expert network was created, which provided a forum for debating and suggesting policy measures and new cooperation modes.
- 2.
There are different methods to determine the DSCR. One possible formula applied by the European Banking Authority is represented by the following:
DSCR = Net operating income (EBITDA)/Total debt service,
where
Net operating income = revenue − COE,
COE = certain operating expenses,
Total debt service = Current debt obligations (capital and interests).
The Italian Chartered Accountants Council (CNDCEC) suggests using this alternative formula for SMEs:
DSCR = Free cash flow/Total debt service,
where,
Free cash flow = Initial cash flow + Each cash inflow of the next 6 months − Each cash outflow of the next 6 months other than financial debt charges,
Total debt service = Current debt obligations (capital and interests).
- 3.
The name is an acronym that stands for the six different steps of the decision-making process. D stands for the definition of a problem within the business activity of each company; E refers to the establishment of criteria of choice, which should be specific and precise in order to understand what should be achieved or avoided; C is related to the consideration of all the alternatives that could meet the criteria; I refers to the identification of the best alternative; D is for the development and implementation of an action plan; and E is the evaluation and monitoring of the solution chosen.
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Appendix: List of Calculated Features of the Early Warning Europe Model
Appendix: List of Calculated Features of the Early Warning Europe Model
Feature for the model |
Calculation of feature |
|---|---|
Gross profit to ordinary operating activity ratio |
\( \frac{\mathrm{Gross}\ \mathrm{profit}\hbox{--} \mathrm{Profit}\ \mathrm{loss}\ \mathrm{from}\ \mathrm{ordinary}\ \mathrm{operating}\ \mathrm{activities}}{\mathrm{Gross}\ \mathrm{profit}} \) |
Ordinary operating activities to profit loss ratio |
\( \frac{\mathrm{Profit}\ \mathrm{loss}\ \mathrm{from}\ \mathrm{ordinary}\ \mathrm{operating}\ \mathrm{activities}\hbox{--} \mathrm{Profit}\ \mathrm{loss}}{\mathrm{Gross}\ \mathrm{profit}} \) |
Return on equity |
\( \frac{\mathrm{Profit}\ \mathrm{loss}}{\mathrm{Equity}} \) |
Profit loss distribution ratio |
\( \frac{\mathrm{Profit}\ \mathrm{loss}\ \mathrm{distribution}\ \mathrm{member}}{\mathrm{Profit}\ \mathrm{loss}} \) |
Asset delta |
\( \frac{\mathrm{Assets}\hbox{--} \mathrm{Assets}\_\mathrm{previous}\ \mathrm{year}}{\mathrm{Assets}\ \mathrm{previous}\ \mathrm{year}} \) |
Non-current asset delta |
\( \frac{\mathrm{Non}\hbox{-} \mathrm{current}\ \mathrm{assets}-\mathrm{Non}\hbox{-} \mathrm{current}\ \mathrm{assets}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Non}\hbox{-} \mathrm{current}\ \mathrm{assets}\ \mathrm{previous}\ \mathrm{year}} \) |
Non-current asset ratio |
\( \frac{\mathrm{Non}\hbox{-} \mathrm{current}\ \mathrm{assets}}{\mathrm{Assets}} \) |
Intangible assets delta |
\( \frac{\mathrm{Intangible}\ \mathrm{assets}-\mathrm{Intangible}\ \mathrm{assets}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Intangible}\ \mathrm{assets}\ \mathrm{previous}\ \mathrm{year}} \) |
Intangible assets ratio |
\( \frac{\mathrm{Intangible}\ \mathrm{assets}}{\mathrm{Assets}} \) |
Property, plant and equipment delta |
\( \frac{\mathrm{Property},\mathrm{plant}\ \mathrm{and}\ \mathrm{equipment}-\mathrm{Property}\;\left(\dots \right)\;\mathrm{previous}\ \mathrm{year}}{\mathrm{Property},\mathrm{plant}\ \mathrm{and}\ \mathrm{equipment}\ \mathrm{previous}\ \mathrm{year}} \) |
Property, plant and equipment ratio |
\( \frac{\mathrm{Property},\mathrm{plant}\ \mathrm{and}\ \mathrm{equipment}}{\mathrm{Assets}} \) |
Long-term investments and receivable delta |
\( \frac{\mathrm{Long}\hbox{-} \mathrm{term}\ \mathrm{investments}\ \mathrm{and}\ \mathrm{receivables}-\mathrm{Long}\hbox{-} \mathrm{term}\;\left(\dots \right)\;\mathrm{previous}\ \mathrm{year}}{\mathrm{Long}\hbox{-} \mathrm{term}\ \mathrm{investments}\ \mathrm{and}\ \mathrm{receivables}\ \mathrm{previous}\ \mathrm{year}} \) |
Long-term investments and receivable ratio |
\( \frac{\mathrm{Long}\hbox{-} \mathrm{term}\ \mathrm{investments}\ \mathrm{and}\ \mathrm{receivables}}{\mathrm{Assets}} \) |
Current assets delta |
\( \frac{\mathrm{Current}\ \mathrm{assets}\hbox{--} \mathrm{Current}\ \mathrm{assets}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Current}\ \mathrm{assets}\ \mathrm{previous}\ \mathrm{year}} \) |
Current assets ratio |
\( \frac{\mathrm{Current}\ \mathrm{assets}}{\mathrm{Assets}} \) |
Inventory delta |
\( \frac{\mathrm{Inventories}-\mathrm{Inventories}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Inventories}\ \mathrm{previous}\ \mathrm{year}} \) |
Inventory ratio |
\( \frac{\mathrm{Inventories}}{\mathrm{Assets}} \) |
Short-term receivable delta |
\( \frac{\mathrm{Assets}-\mathrm{Assets}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Assets}\ \mathrm{previous}\ \mathrm{year}} \) |
Short-term receivable ratio |
\( \frac{\mathrm{Short}\hbox{-} \mathrm{term}\ \mathrm{receivables}}{\mathrm{Assets}} \) |
Short-term investment delta |
\( \frac{\mathrm{Short}\hbox{-} \mathrm{term}\ \mathrm{receivables}-\mathrm{Short}\hbox{-} \mathrm{term}\ \mathrm{receivables}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Short}\hbox{-} \mathrm{term}\ \mathrm{receivables}\ \mathrm{previous}\ \mathrm{year}} \) |
Short-term investment ratio |
\( \frac{\mathrm{Short}\hbox{-} \mathrm{term}\ \mathrm{investments}}{\mathrm{Assets}} \) |
Cash and cash equivalent delta |
\( \frac{\mathrm{Cash}\ \mathrm{and}\ \mathrm{cash}\ \mathrm{equivalents}-\mathrm{Cash}\ \mathrm{and}\ \mathrm{cash}\ \mathrm{equivalents}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Cash}\ \mathrm{and}\ \mathrm{cash}\ \mathrm{equivalents}\ \mathrm{previous}\ \mathrm{year}} \) |
Cash and cash equivalent ratio |
\( \frac{\mathrm{Cash}\ \mathrm{and}\ \mathrm{cash}\ \mathrm{equivalents}}{\mathrm{Assets}} \) |
Equity delta |
\( \frac{\mathrm{Equity}-\mathrm{Equity}\ \mathrm{previous}\ \mathrm{year}}{\mathrm{Equity}\ \mathrm{previous}\ \mathrm{year}} \) |
Solvency ratio |
\( \frac{\mathrm{Equity}}{\mathrm{Assets}} \) |
Liabilities other than provision delta |
\( \frac{\begin{array}{l}\mathrm{Liabilities}\ \mathrm{other}\ \mathrm{than}\ \mathrm{provisions}\\ {}-\mathrm{Liabilities}\ \mathrm{other}\ \mathrm{than}\kern0.34em \mathrm{provisions}\ \mathrm{previous}\ \mathrm{year}\end{array}}{\mathrm{Liabilities}\ \mathrm{other}\ \mathrm{than}\ \mathrm{provisions}\ \mathrm{previous}\ \mathrm{year}} \) |
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Crovini, C. (2022). Crisis Management and Risk Management in SMEs: Towards an Integrated Early Warning System. In: Durst, S., Henschel, T. (eds) Crisis Management for Small and Medium-Sized Enterprises (SMEs). Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-030-91727-2_13
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