Topical issues of diagnosing of enterprise bankruptcy
Table of contents: The Kazakh-American Free University Academic Journal №9 - 2017
Authors: Urazova Natalya, Kazakh-American free university, Kazakhstan
Litvinenko Victoriya, Ust-Kamenogorsk branch of Plekhanov Russian University of Economics,
Kazakhstan
An important problem in a modern, dynamically developing economy is
the prevention of bankruptcy, its timely diagnosis and elimination. The
activities of many enterprises and companies are more financed by borrowed
funds, so it is very important to have a mechanism for diagnosing the stability
of the debtor's enterprise, both for managers of the organization and for
regulating state bodies.
In the context of transformation of economic relations, a high
degree of uncertainty is particularly characteristic, which significantly
increases the risk of bankruptcy of enterprises as a result of the impact of
both external and internal economic factors. Many commercial enterprises of
various forms of ownership have been on the verge of bankruptcy over the past
ten years. In this regard, the problem of forecasting the possible bankruptcy
of enterprises is extremely topical today, that is, the question of choosing a
mechanism that allows to predict the bankruptcy of an enterprise is urgent in
the near future [1, p. 78].
The relevance of the research topic is due to a number of reasons:
- first, at the present time the key problem in the Kazakhstan
economy is the nonpayment crisis, and a good half of the Kazakhstani
enterprises should have been declared bankrupt for a long time, and the
received funds are redistributed in favor of efficient production, which would
undoubtedly contribute to the improvement of the Kazakhstan market;
- secondly, in conditions of mass insolvency of economic entities,
special measures are taken to prevent bankruptcy in crisis situations, as well
as measures aimed at restoring the solvency of the enterprise and stabilizing
its financial condition.
From the point of view of financial management, bankruptcy
characterizes the realization of catastrophic risks of the enterprise in the process
of its financial activity, as a result of which it is unable to satisfy, in due
time, claims from creditors and fulfill obligations to the budget.
The essence of bankruptcy consists in the absence of money from the
enterprise to pay for its obligations, this is a state of financial insecurity,
that is, an absolute breakdown in production and economic activities, which is
the cause of the ruin and liquidation of the enterprise.
The preconditions for bankruptcy are manifold - this is the result
of the interaction of numerous factors, both external and internal [3, p. 92].
External factors include:
- economic: the crisis state of the country's economy as a whole;
general decline and unprofitableness of production; the emphasis of public
policy on fiscal function; imperfection and instability of financial and credit
policy, manifested in the growth of interest rates and inaccessibility of loans
for most enterprises; errors in economic regulation, leading to devaluation of
the national currency and exacerbating inflation; instability of the financial
system, rising prices for resources, changing market conditions, insolvency and
bankruptcy of partners;
- socio-political: political instability in society; lack of
qualified specialists due to lack of quality targeted retraining; low level of
income of the population, affecting the amount of effective demand for goods
and services; low fertility;
- information: lack of experience in crisis management;
ineffectiveness of anti-crisis regulation due to imperfection of the current
system of accounting and reporting; lack of quality information on market
conditions;
- market: the lack of a system of regulation of various types of
economic activity that is adequate to market conditions; underdeveloped
business infrastructure; low level of competitiveness of domestic products;
competition with foreign producers; non-compliance with legal and ethical
standards of conduct in business; the severance of economic ties with
neighboring countries and, accordingly, between enterprises; loss of sales
markets;
- legal: imperfection and inconsistency of the legislative framework
in the field of economic law, antimonopoly policy, business;
- scientific and technical: reduction of the scientific and
technical potential of enterprises due to lack of funds to ensure its
functioning [5, p. 43].
Internal causes of the crisis:
- material and technical: weak security with a high level of moral
and physical depreciation of fixed assets; lack of funds for their renewal;
shortage of working capital and their low turnover; a decrease in the
efficiency of the use of material and technical resources and the production
capacity of fixed assets;
- organizational: inefficiency and irrationality of the organization
of the production process; lack of financial transparency of costs, and as a
consequence, the inability to manage them; high production costs; the lack of a
systematic approach to the management of the enterprise and the uncertainty of
the strategic outlook for its development; low quality of managerial decisions;
failures in the supply of material resources due to unreliability of suppliers;
violation of payment discipline by buyers; rapid and uncontrolled expansion of
economic activity;
- socio-economic: manipulation of the assets of the enterprise as a
result of distortion of their current value under the influence of inflation
and revaluation; lack of marketing information due to "opacity" of
business; attraction of borrowed funds in the turnover of the enterprise on
disadvantageous conditions, which leads to the washing out of own funds, a
decrease in the profitability of economic activity and the ability to
self-finance.
As a rule, bankruptcy is a consequence of the combined effect of
internal and external factors. In a real economic process, various factors can
lead to enterprise bankruptcy that intensify or weaken mutual influence.
The bankruptcy of inefficiently operating and financially weak
companies as a tool for the rehabilitation of the economy as a whole is an
indispensable element of structural adjustment. In this regard, the problem of
the formation of a bankruptcy mechanism, the inevitable costs of this process
are mandatory attributes of the economy of any country. The task of determining
the degree of bankruptcy risk is actual both for the owners of the enterprise
and for its creditors, therefore any scientifically grounded methods for
assessing the risk of bankruptcy are of interest [6, p. 74].
The task of management is to timely recognize and ensure the
adoption of such management decisions that will help reduce the impact of
negative processes on the state of the facility. Let not to completely prevent
the crisis, but at least partial localization of its most significant
manifestations. The content and results of diagnostic studies will lead to the
conclusion that they are one of the most universal means of obtaining reliable
information about the state and deviations in the development of the object
under study. They are especially important in the management of socio-economic systems,
since they can identify in advance, prior to the appearance of negative trends
in any internal or external processes covering their activities, the moments
that give rise to such tendencies, impulses and take appropriate measures to
eliminate them or reduce the degree negative impacts. The greatest effect of
conducting diagnostic studies is achieved if they have a complex progressive
nature.
Assessment, forecasting of insolvency and probability of bankruptcy
risk are of interest not only for shareholders, creditors, suppliers, customers
and others in choosing the most reliable and promising business partners, but
also for self-assessment, which allows us to recognize signs of deterioration,
react more promptly to them and more likely to avoid or reduce the risk of
bankruptcy by timely taking appropriate actions for out of this situation.
In the understanding of bankruptcy, not only its causes are
important, but also the consequences for the enterprise in the system of its
financial management. Correctly organized financial management can weaken the
influence of insolvency (bankruptcy) and achieve restoration of the viability
of the organization in order to preserve it. A renewal of the organization may
happen while retaining owners and managers or restructuring the organization
(merger, separation, affiliation, separation). Under other conditions,
bankruptcy can lead to the complete liquidation of the enterprise; to a change
of ownership and a restructuring of the process of its functioning.
The consequences of financial insolvency and bankruptcy are closely
related to two factors: its causes and the ability to manage the processes of
crisis development [7, p. 56].
The consequences of financial insolvency and bankruptcy for an
enterprise can lead to abrupt changes or a soft, long and consistent exit from
it. Crisis changes in the development of the enterprise are long-term and
short-term, qualitative and quantitative, reversible and irreversible.
The different consequences of financial insolvency and bankruptcy
are determined not only by its nature, but also by the nature of the crisis
management that can either soften or aggravate the crisis. The management
capabilities in this respect depend on the goal, professionalism, management
skills, motivation, understanding of causes and consequences, responsibility
[3, p. 115].
Negative consequences of financial insolvency and bankruptcy for the
enterprise:
- a significantly «tarnished» reputation: even if the enterprise has
successfully overcome the crisis, its reputation in the eyes of customers,
suppliers and other users may be shaken. Usually reputation is ruined not only
by the enterprise, but also by people who were responsible for making important
decisions during the crisis. The latter can be permanently branded with labels
such as "unable to solve complex problems" or "the one that
caused the crisis";
- a decrease in the level of trust, the degree of its reliability in
the eyes of customers: trust and reliability are key elements of the company's
reputation. Create and form them is difficult, lose is easy. It takes a long
time to prove to employees, customers, sellers that the enterprise is reliable,
that it can be trusted. Unfortunately, if you do not manage such crises, then
the image of the company can be destroyed within a few days or even hours, and
the restoration of lost confidence in the eyes of customers will take years and
years;
- loss of employee loyalty: an unmanageable crisis is most often
threatened by a rapid loss of loyalty and employee support. Financial
insolvency and bankruptcy shows the staff the level of leadership preparedness,
ability (or inability) to manage in difficult situations. During the crisis,
employees closely monitor the actions of their leaders and evaluate them;
- decrease in sales: the exit from financial insolvency and
bankruptcy is always accompanied by a fall in sales. Consumers are likely less
be attracted by the products and services of such a company, and they will
easily reorient to its competitors. Even if they retain a preference for the
goods or services of the enterprise, they may have a prejudice that the management
is too busy struggling with the crisis and it is not up to customer satisfaction;
- falling profits: profits always fall when the enterprise faces a
crisis: inevitably lower incomes and rising costs, since anti-crisis measures
require significant additional resources. If the crisis situation can not be
quickly taken under control, a drop in profits may complicate it. Such a threat
often requires precautionary measures. The costs necessary to minimize the
damage from the crisis may include attracting specialists in crisis management
or public relations (public relations - PR), organizing conferences, sending
letters to consumers by mail, videoconferencing, making phone calls, organizing
special meetings with consumers, using different means of communication, etc .;
- decrease in the level of labor productivity of personnel: during
and after financial insolvency and bankruptcy, the level of collective labor
productivity decreases. However, the crisis situation can also be used to
mobilize the will and efforts of employees aimed at overcoming them. An
important condition for this is the presence of leadership qualities in the
manager (manager), the ability to restructure the system of expectations and
motivation of personnel, organize resistance to rumors, provide greater
information to the staff;
- focusing management on the ways out of the crisis: this is a
necessary element, but we must bear in mind that it is inevitable to reduce
attention, time and resources directed to other activities that maximize
profits. To overcome this difficulty helps the management understand that a
successful business should always concentrate on actions that bring profit and success
to the enterprise;
- changes in the composition of top-level management: during the
period of financial insolvency and bankruptcy, presidents of companies are
often deprived of their posts by decision of the board of directors. The
executive vice president, vice president, directors, department managers feel
vulnerable enough, many of them begin to search for new jobs, and put
themselves out of their responsibilities. Training in crisis management reduces
nervousness, ensures more efficient work of top management personnel, as it provides
an understanding of the psychological causes of feelings of uncertainty and
uncertainty that covers a significant part of managers;
- changes in the range of goods or services of the enterprise: in
conditions of financial insolvency and bankruptcy, enterprises often produce
unplanned and expensive changes in the products and services they offer on the
market. This can be a complete change in the marketing strategy for promoting
products and services or more drastic changes, such as, for example, breaking
down a brand or leaving a particular market segment;
- change of the name of the enterprise: such a radical measure is
applied if the damage caused by financial insolvency and bankruptcy does not
allow it to continue to function successfully in the future; it is necessary to
form an absolutely new image, a new identity [1, p. 65].
But sometimes financial insolvency and bankruptcy can be beneficial
for the enterprise - it is possible when it is effectively controlled. Let's
try to systematize such situations from the point of view of the advantages:
- growth of popularity and recognizability of the name of the
company (enterprise) and its brands. The firm, faced with a crisis, becomes the
object of close attention of competitors, government bodies, distributors and
the media. It is easier to achieve such a positive effect when the enterprise
is a "victim" of the crisis, and not the "culprit" of the
incident (for example, it stops working because of natural disasters such as a
hurricane or flood). In such a situation, it is much easier to enlist the
support of customers, sellers, employees, consumers than when the crisis is
caused by management mistakes [3, p. 59];
- the opportunity to demonstrate the management competence of the
company's management. Financial insolvency and bankruptcy provide an excellent
opportunity to show in good or bad light the manager of the highest rank,
responsible for resolving the problems of the organization;
- new opportunities for the growth and development of managers.
During financial insolvency and bankruptcy, some managers not only improve
their reputation, but also advance through the ranks. This is achieved in
several ways: a quick reaction to the problem and clear actions aimed at its immediate
solution; demonstration of unshakable confidence (but not arrogance) in their
own rightness, perseverance in carrying out their plan for overcoming the
crisis; participation and compassion for people affected by the negative
consequences of the crisis (if the company complicates the life of competitors,
its head apologizes for the inconvenience); immediate implementation of changes
in the organization, ensuring that the crisis will not happen again or will
proceed in a milder form; confidence that the influence of the manager is
significant (this does not mean that you have to deal with everything yourself,
but understand that the influence of the manager is growing as the problem is
resolved); assuming responsibility and ultimate guilt (if this, of course, is
necessary);
- improvement of relations. Crisis situations do not always cause
insurmountable problems, skillful management of financial insolvency provides
great opportunities for strengthening ties and normal stable relations with
those whose help the enterprise expects. However, this will happen only if the
leadership has previously won their location and trust and will adhere to the
following tactics: discuss the situation, explain in detail the expected
actions from them and justify their necessity; Demonstrate gratitude for their
help and support; keep them informed, provide the necessary information in
order to maintain confidence in the favorable outcome of the crisis; maintain
friendly relations with them after the crisis;
- carrying out the necessary changes. Some enterprises need a
restructuring to continue their existence. It also happens that the people who
lead them do not realize that the problem really exists, or simply do not want
to invest the time and effort to eliminate it. They often hope that the problem
will disappear by itself. In this case, it is very likely that in the later
stages of the development of the crisis it will be necessary to take drastic
measures [2, p. 82].
Thus, bankruptcy is an inevitable phenomenon of any modern market,
which uses insolvency as a market instrument for redistributing capital and
reflects the objective processes of economic restructuring. Bankruptcy is, as a
rule, a consequence of the combined effect of internal and external factors.
Overcoming the crisis requires the development of special methods of enterprise
management at both macro and micro levels. As the world experience shows, the
anti-crisis process of bankruptcy management in a market economy is a
controlled process, therefore the objective need to bring the production
structure to real solvent demand is the main link in the bankruptcy system.
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Table of contents: The Kazakh-American Free University Academic Journal №9 - 2017
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