Know the indicators of corporate crisis it is essential for those who do business. The entry into force of the New Code of Business Crisis and Insolvency (Legislative Decree 12 January 2019, n.14), which took place on 15 July 2022 and which updated the provisions of Law 19/10/217 n.155 , has a dual objective: to identify companies in liquidity crisis from the first symptoms, with the aim of limiting the damage, and to safeguard the most deserving activities that are experiencing a moment of difficulty. If the previous law identified income, equity and financial imbalances as indicators of the crisis, relating them to the characteristics of the company and taking into account the date of its establishment, the new Code introduces a series of interesting innovations.
Business crises, moreover, can affect companies of any sector and size. Through constant monitoring and implementing preventive strategies, it is possible to promptly detect crisis indicators and make corrective measures. Let’s see what they are the indices to check and how digital solutions, such as budget management and analysis software, can prevent business crisis.
What are the indicators of a corporate crisis?
The current legislation no longer mentions the crisis indices present in the old version of the Corporate Crisis and Insolvency Code. However, it is believed at many levels that the monitoring of these indicators represents a valuable tool for preventing any crisis situations. These indices were originally identified by National Council of Chartered Accountants and Accounting Experts and are no longer in force from a regulatory point of view.
It’s about 7 alert indices (the first two valid for each type of activity, the next five considered “sectoral indices”) which identify and identify a state of business crisis.
- DSCR (Debt Service Coverage Ratio) forecast at 6 months.
- Sustainability index of financial charges.
- Capital adequacy index.
- Liquid return index of the asset.
- Social security and tax debt index.
1. Net worth
In the presence of a company net worth negative or lower than the legal minimuma state of crisis is presumable. Faced with this hypothesis, the company is faced with two alternatives: liquidation or the reconstitution of the company’s share capital (recapitalization) through the payment of resources by the shareholders. A negative net worth anticipates the lack of prerogatives for business continuity.
In the case of positive net worth, however, we move on to the analysis of the second alert index. This ratio is fundamental for evaluating the financial strength of the company. It is important to note that negative equity can also limit a company’s ability to access external financing, as investors and banks often evaluate creditworthiness based on this metric.
2. 6-month forecast DSCR (Debt Service Coverage Ratio).
The six-month forecast DSCR evaluates the company’s prospect of debt sustainability in the following months. This ratio is obtained by calculating income and expenses in the form of liquidity and represents the company’s ability to repay long-term debts. With a result less than 1, the cash flow is not sufficient and the company is presumably in a state of crisis. With a result greater than 1, however, the cash flow is sufficient to meet financial commitments. A DSCR under the unit can be a red flag for creditors and could lead to tighter credit conditions, including higher interest rates or requests for additional collateral.
3. Sustainability index of financial charges
Identify the relationship between financial charges and a company’s turnover. The threshold value is between 1.5% and 3.8%: in the event of values greater than or equal to the threshold value, the alert signal is turned on. This ratio is particularly useful in scenarios of fluctuating interest rates or other market conditions that can affect the cost of debt, allowing the company to anticipate changes in its financial expenses.
4. Capital adequacy ratio
That is, the ratio between net worth and total debts. In this case the threshold value is between 2.3% and 9.4% and the alert signal is activated in the event of values lower than or equal to the threshold. The ratio offers a measure of the company’s ability to absorb potential losses, being an indicator of financial robustness in the face of economic or financial shocks.
5. Liquid return index of the assets
Ratio between cash flows and total assets. The threshold values vary from a minimum of 0.3% to a maximum of 1.9%. The index is critical if it is lower than the sector parameter. Analyzing this index can help identify inefficiencies in the management of company resources or untapped opportunities to optimize investments in fixed or working capital.
6. Liquidity ratio
Equivalent to ratio of total assets to total short-term liabilities. The threshold value is between 69.8% and 108%. Being aware of this ratio is crucial for short-term financial planning, especially in times of economic uncertainty, to ensure uninterrupted business continuity.
7. Social security and tax debt ratio
Examine the ratio between total social security and tax debt and total assetswith a threshold value between 2.9% and 14.6%. The indicator must take on a lower value than the thresholds. Effective monitoring of this ratio can prevent problems with tax and social security authorities, reducing the risk of legal disputes or penalties that can weigh on company finances.
How to check the indicators of a corporate crisis?
For a crisis situation to be detected they must be the threshold targets set by all indices were exceeded. This scenario, however, is not entirely unlikely. This is why keeping the indices under control is essential to prevent a state of crisis.
The use of software guarantees accurate and simple control, allowing the economic and financial balance to be verified day by day and the business continuity to be assessed.
Crisis indicators allow companies to implement a series of strategies to constantly monitor their health and prevent difficult situations.
TeamSystem Check Up Company it is the cloud software that ensures the constant monitoring of crisis alert indices to prevent any insolvency solutions. Accessible from any position, it allows you to easily retrieve past financial statements, view the trend of budget indices and signs of possible crisis, ensuring continuous monitoring of the health of your company.
