Ministry of education of republic of Moldova Moldova state university

The Faculty of Economic Sciences

Business and Administration department

Individual work on Financial Management :

Risk of insolvency

Author:Jignea Cristian

student, year 3 ,

group BA1703A

Coordinator:

Mihalachi Ruslan.

Dr.conf.univ

Chişinău, 2019

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Cuprins:
1.Introduction……………………………3
2.The Bankrupcy problem and consequence… 4
3.Causes of Business Insolvency……………...6
4.How To Avoid Insolvency…………………..8
5. Statistic data………………………………..10
6. Biblyografy…………………………………14

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1.Introduction

Business failure is a characteristic feature of all economies. It has an impact on a business

as well as its surroundings. Therefore, it is necessary to mind out the prediction of the risk of
business failure. The starting point for risk assessment is the issue of risk definition. There
are different opinions on this issue, mainly from the historical as well as contemporary point
of view. Domestic and foreign literature provides several definitions of risk. The term “risk”
comes from Arabic, and expresses an unexpected event. Risk is usually defined as
something unstable, indefinite which is related to the course of phenomenon and disturbs its
behavior. Key definition of risk was introduced by Lowrance (1976); Šoti´c and Raji´c
(2015) who said that “risk is the measure of probability and the weight of undesired
consequences”. According to Cunderl ˇ ík (2004), risk is the expression of the degree of
uncertainty in various forms. The risk is defined as the state of imperfect knowledge when
the decision-maker is aware of the various possible consequences of his decision and is able
to estimate the degree of probability that this or that result occurs (Buganová and Hudáková
2012). Businesses have to face certain risks, whether financial, commercial, informational or
personal. According to Fetisovová et al. (2004), for each financial decision, it is necessary to
consider not only its expected return, but also the risk associated with it. Risk is one of the
most important limits that define the scope of financial decision-making (Mariniˇc 2008).
Special attention should be paid to the risk of long-term financial decisions. Risk is the
chance to achieve above-average return on investment (Kluˇcka 2006). In 2009, Tranchard
(2018) provided the following definition of risk: “Risk is the effect of uncertainty on
objectives”
Risk is the probability that actual results will deviate from planned (expected) ones, in both
positive and negative meaning (Markoviˇc 2010). Risk is the “uncertainty” in which we are
able to quantify the probability of diverting actual conditions, processes or results from the
expected values using different methods (mainly statistical). Theory defines risk as a
possibility of positive or negative diversion. In practice, risk is understood only as a
negative diversion. The risk is higher the more the actual result can deviate from the
expected one, in both positive and negative directions (Maˇrík et al. 2011). The risk can be
expressed as a quantitative and qualitative threat, while it is characterized by the probability
of the occurrence of risk situation which can culminate in the crisis of a system (Tej et al.

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 2013). Risk is a category that affects the existence and performance of a business
(Koscielniak 2014). No economic entity or business can predict its economic and financial
results only based on internal results, since every activity involves external and
macroeconomic risks. External as well as internal risks are the determinants of corporate
bankruptcy. However, the main determinant of bankruptcy is insolvency (Cisko and Klieštik
2013). Some studies on risk of bankruptcy consider negative profitability as a prerequisite
for bankruptcy (Scott 1981; Lukason and Laitinen 2018). Bankruptcy can be caused by both
liquidity and profitability, as well as other financial areas of business.

2.THE BANKRUPTCY PROBLEM AND

CONSEQUENCES
.

The would-be bankrupt firm or individual to be, liquidated would insufficient liquid asset that
will go round the creditors. The bankruptcy problem deals with how to divide the asset among
all creditors.

A bankruptcy problem is a pair

d signifies the total estate value and c is the vector of the creditors’ claims. The summation of
these claims is, denoted by D.

In order to share the limited assets amongst claimants, there is the need for allocation.

The apportionment in such a problem is an n-tuple

In an allocation rule, a function that assigns a unique allocation to each bankruptcy problem
denotes the set of all creditors by N. Aumann and Maschler (1985) identify three practical
approaches for resolving bankruptcy problems. However, each method is deficient in one or
more ways.

The methods are the proportional rule where the available assets are, divided proportionally to
each creditor’s claim.

The first, proportional rule is, symptomatically defined as follows:

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In the second approach, the constrained equal-awards rule shares the assets equally among the
claimants, nobody however gets more than their entitlement/claim.

The constrained equal award (CEA) rule is, defined as:

A unique solution is arrived at when in equation (2) d > A. If d = A, any solution A is greater
than or equal to the maximum claim. The rule assigns the same sum to all creditors as long as
this sum does not exceed each creditor’s claims.

The third method, which is the constrained equal-losses rule divides the difference equally
between the aggregate claim and the asset and ensures that no agent is negatively affected. An
indirect approach was adopted by Maschler and Tijs (1988).

The study applied the cooperative game theory as a means of discovering the allocation rules
and analysing their properties. Such solution are usually required to be Pareto efficient,
symmetric and invariant to strategic equivalence. These traditional methods assume that the
wealth of the creditor diminishes causes when a firm becomes bankrupt, not all creditors get to
recover the whole debt. However, new approaches have redefined the traditional problem
statement by making it applicable to other bankruptcy issues (Bergantiños et al., 2010; and
Calleja et al., 2005). The new generalized bankruptcy problem statement as opined in the
research by Karpov and Yurkov (2012) integrates the system of inter-creditor debts which
makes it a better model of the real world problem than the traditional method.

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3.Causes of Business Insolvency

Business insolvency can involve a range of factors, but there are always common elements. Capital
management, cashflow, and business decisions can all be factors. In some cases, there are “no fault”
issues, and business contract problems or failures of business associates can play roles in
insolvencies. It’s important to recognize that business insolvency and liquidation is preventable and
that advice is readily available.

Business insolvency- Common issues

Most people are aware of the statistic that over 50% of “businesses fail in their first three
years”. The fact is that risks in the first years are the fundamental ongoing risks to
businesses, however long they’ve been in operation.

There are multiple reasons for this situation:

 Lack of expertise in commercial operations: Business was conducted in a way to

increase risk.
 Lack of knowledge of business practices: Even the most basic business practices are
important. Entering into a contract, for example, without being aware of contractual
obligations is often a serious mistake.
 Inadequate resources to cover the costs of making the business viable: To be
viable, some businesses require capital and time many businesses just don’t have.
 Excessive expenditure, usually while trying to build business: Throwing money at
business development can be fatal.
 Failure of clients to pay money owing or to follow through on business
projects: One of the most common of all reasons for business failure is being dragged
down by another failing business.
 Competition: Many businesses seriously underrate their competition, which results in
business failure.
 Impractical business ventures: Very common, high risk ventures generally include
costs to businesses which put the business in debt.
 Financial management: Even good businesses can be sabotaged by bad financial
management.
 Credit situations: Borrowing money on the basis of future revenue is a typical reason
for business insolvency.

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Major causes of business insolvency

Insolvency, when it happens, is actually caused by loss of capital, loss of revenue and loss
of credit. A business in the process of becoming insolvent really is like “death by inches”.
Although many businesses are all too well aware of their problems, they fail to deal with the
issues correctly.

Problems drag on and are exacerbated by a tangle of situations, like credit problems, waiting
for payments that never happen, accumulating bills and similar disasters. Problems
compound and multiply. These common issues, if they’re allowed to continue, resolve
themselves into sudden unexpected crises.

The effects of business insolvency

Business insolvency can occur in degrees of difficulty:

 Receivership- A receivership is when a bank appoint a receiver to sell the assets it has
security over.This happens when a business is considered salvageable,
 Liquidation- If a business isn’t considered salvageable, the business is wound up by
either application for voluntary liquidation or liquidation processes conducted by a
liquidator appointed either by creditors or a court.

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 4.How To Avoid Insolvency

Improving Cash Flow

Similarly, anything which benefits the cash-flow cycle is going to lower your overall risk of
insolvency. You can do this by:

 Invoicing more efficiently

 Holding Less Stock
 Accurate cash-flow forecasting
 Using Invoice Finance

Reducing Business Expenses

It stands to reason that spending less is going to positively impact available cash. Here are
some strategies for doing that:

 Lease rather than buy business equipment

 Push your suppliers for the best deals or shop around
 Embrace technology and automation
 Implement a strict business budget
 Save on wages by outsourcing some work
 Eliminate inefficiency
 Use teleconferencing as an alternative to expensive corporate travel

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Reducing Company’s Risk of Becoming Insolvent
• Credit check your customers – Checking the credit references of prospective trade debtors
is an absolute must, particularly if they operate in an industry with a high failure rate. The
highest failure rates are shown on page 10 of this official Insolvency Service release.

• Regularly review credit limits – Companies regularly extend their credit terms to secure
new business and develop a good relationship with customers, but you should always keep a
close eye on your credit limits.

• Implement credit control procedures – You should have a clear and effective credit control
procedure you follow every time an account becomes overdue. This will help you ident ify your
exposure at an early stage and act accordingly.

• Retention of title clauses – If appropriate, incorporate retention of title clauses in the terms
of your customer contracts. This allows you to seek recovery of your products in the event of
non-payment.

• Explore credit insurance and invoice financing – A credit insurance policy will pay out
and protect your business against a customer’s failure to pay. Alternatively, you might
consider an invoice financing agreement, such as non-recourse factoring, which pays you a
proportion of the value of an invoice upfront. This can help to protect your bu siness from the
impact of an insolvent customer.

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5.Date statistice
Cantitatea de companii prezente pe teritoriul R.Moldova 2014
Numărul ÎMM în 2014 pe genuri principale de activitate ale întreprinderilor
mii unităţi
Principalele genuri de activitate ale ÎMM - din care:
întreprinderilor total întreprinderi întreprinderi întreprinderi
mijlocii mici micro

Total 52,3 1,6 10,1 40,6

Agricultura, economia vînatului

2,9 0,2 1,0 1,7
şi silvicultura

Industria prelucrătoare 4,8 0,2 1,1 3,4

Energia electrică, gaze şi apă 0,3 0,0 0,1 0,2

Construcţii 2,8 0,1 0,8 1,9

Comerţ cu ridicata şi amănuntul 20,5 0,4 3,5 16,5

Hoteluri şi restaurante 1,7 0,0 0,4 1,3

Transport, depozitare şi
3,5 0,1 0,9 2,5
comunicaţii

Tranzacţii imobiliare 9,6 0,2 1,5 7,8

Alte activităţi 6,3 0,2 0,9 5,2

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Cantitatea de companii prezente pe teritoriul R.Moldova 2015
Numărul ÎMM în 2015 pe genuri principale de activitate ale întreprinderilor
mii unităţi
Principalele genuri de activitate ale ÎMM - din care:
întreprinderilor total întreprinderi întreprinderi întreprinderi
mijlocii mici micro
Total 49,8 1,6 10,0 38,2
Agricultura, silvicultura și pescuit 3,1 0,2 1,1 1,8
Industria prelucrătoare 4,2 0,2 1,0 2,9
Producția și furnizarea de energie electrică și
0,1 0 0,0 0,1
termică, gaze, apă caldă și aer condiționat
Distribuția apei; salubritate, gestionarea
0,3 0,0 0,1 0,3
deșeurilor, activități de decontaminare
Construcţii 2,9 0,1 0,8 2,0
Comerţ cu ridicata şi cu amănuntul; întreținerea
19,8 0,5 3,5 15,8
și repararea autvehiculelor și a motocicletelor
Transport și depozitare 2,6 0,1 0,8 1,7
Activități de cazare și alimentație publică 1,7 0,0 0,3 1,4
Informații și comunicații 2,0 0,0 0,3 1,6
Tranzacţii imobiliare 3,4 0,1 0,8 2,5
Activități profesionale, științifice și tehnice 4,2 0,0 0,4 3,7
Alte activităţi 5,5 0,2 0,9 4,4

Cantitatea de companii prezente pe teritoriul R.Moldova 2016

Tabelul 2. Numărul ÎMM în 2016 pe genuri principale de activitate ale întreprinderilor
mii unităţi
Principalele genuri de activitate ale ÎMM - din care:
întreprinderilor total întreprinderi întreprinderi întreprinderi
mijlocii mici micro
Total 51,6 1,3 5,8 44,5
Agricultura, silvicultura și pescuit 3,4 0,2 0,7 2,5
Industria prelucrătoare 4,4 0,2 0,8 3,4
Producția și furnizarea de energie
electrică și termică, gaze, apă caldă și aer 0,1 0,0 0,0 0,1
condiționat
Distribuția apei; salubritate, gestionarea
0,4 0,0 0,1 0,3
deșeurilor, activități de decontaminare
Construcţii 3,0 0,1 0,5 2,4
Comerţ cu ridicata şi cu amănuntul;
întreținerea și repararea autvehiculelor și a 20,3 0,3 1,7 18,3
motocicletelor
Transport și depozitare 2,7 0,1 0,5 2,1

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 Activități de cazare și alimentație publică 1,8 0,0 0,3 1,5
Informații și comunicații 2,0 0,0 0,2 1,8
Tranzacţii imobiliare 3,3 0,0 0,3 3,0
Activități profesionale, științifice și
4,4 0,0 0,2 4,2
tehnice
Alte activităţi 5,8 0,2 0,6 5,0

NUMARUL DE COMPANII DECLARATE

INSOLVENTE

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Bibliography
https://statistica.gov.md/category.php?l=ro&idc=368

https://www.touchfinancial.co.uk/knowledge/

https://www.researchgate.net › publication

https://www.academia.edu/9354337/Corporate_Bankruptcy_Assessment_Analysis_and_Predict
ion_of_Financial_Distress_Insolvency_and_Failure

http://store.ectap.ro/articole/1212

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