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EKONOMIKA IR VADYBA: 2010. 15 ECONOMICS AND MANAGEMENT: 2010. 15

PROGNOSTICATION OF CRISIS PHENOMENA IN THE COMPANY

Milena Filipova

Southwest University N. Rilski, Bulgaria, [email protected]

AbstractThe crisis situations in the company development often can not be eliminated. They occur as objective

phenomena reproducing the cyclic character of development of the social-economic systems. But the grade of

influence of crisis can be and must be limited by taking into account their peculiarities and predicting theiroccurrence. That determines the significant part of crisis phenomena prognostication in the management ofcrisis situations. The subject of research in this paper are the methods of prognostication of the crisis

phenomena in the company. The major research methods used in it are the methods of analysis andcomparison. The prognostication of the crisis phenomena is carried out through the identification of the

potential threats. Therefore it is first necessary to organize the process of receipt of true informationregarding the potential threats. As a rule this information is incomplete and fragmented. It can be the firstalarm of the possibility of occurrence of a particular threat or crisis situation. In order to analyze the weak

signals it is necessary to know the theoretical aspect of the potential threats, for example, the cyclicrecurrence of crisis in production in accordance with the theory of Tugan-Baranovsky and Kondratiev. In this

work attention is also paid to the method of Beaver for crisis forecasting, the model developed by Ed.

Altman, Hoffers, the classification of the typical features of crisis situation analysis, developed by the USresearch-worker Ansoff and the system of methods of express-analysis of the typical indicators. In regard tothe business the crisis is a period of instability, a situation in which serious changes occur. The changesoutcome can be very unfavorable, or positive. But every crisis constitutes a threat for the survival of the

company and should be forecasted.Keywords: crisis situations, prognostication, management of crisis situations.

Introduction

The authors interest in this work is aimed at studying the methods of prognostication of the crisi

phenomena in the company and their role in reducing the crisis grade and power of influence. The motive o

research to this direction is the understanding that the prognostication of crisis situations and phenomena is of

major significance for the development and implementation of the least hazardous management solutions tha

would contribute to the achievement of the anti-crisis goal adopted and to obtaining of a result with the minimumuse of additional means and with the minimum negative impact. The major methods of research used in this work

are the methods of analysis and comparison.

In unison with the aforesaid this work studies the method of Beaver, method of Altman, method of Hofer

method of express analysis and the classification of Ansoff of the typical features of crisis situation analysis. The

stated accents of the research work aim at revealing the characteristics of methods for prognostication of crisis

situations and phenomena and the possibilities of their implementation in practice.

Methods of prognostication of crisis phenomena in the company

Prognostication of crisis phenomena is implemented through definition of the potential threats. Therefore i

is first necessary to organize the process of receipt of true information in regard to the potential threats. Tha

information is frequently incomplete and fragmented. It can be the first signal for the possible occurrence of adanger or a crisis situation. In this context the company should perform monitoring of the external and interna

environment. As far as the issues related to the analysis of the internal and external environment have been

extensively discussed in the scientific literature and many companies apply it in practice we shall not devote any

special attention to it in this work. For the analysis of the weak signals it is necessary to be aware of the theoretica

aspect of the potential threats, and namely the cyclic recurrence of crisis in industry according to the theory o

Tugan-Baranovsky and Kondratiev as presented in figure 1. (Chernyavskiy, 2006)

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Figure 1. Possible variants of transition from threat into a crisis situation

As shown on figure 1 there are three variants of transition from threat into a crisis situation. Variant 1

wave. The company has achieved the planned level of profitability (income). As a result from the occurrence of a

threat the indicators of effectiveness start fluctuating. Variant 2- decline. There is a possibility for the occurrenc

of consequences from the development of threads if no measures are undertaken for the stabilization of situation

decrease of efficiency of production, economic decline. Variant 3- growth. Analysis of the reasons for th

decrease of profitability, undertaking of measures for stabilization (introduction of innovations, rationalization o

production, extension through investments, renovation of production means, etc.). In this case there is a possibility

of increasing of production efficiency and a way out of the crisis situation.

One of the first methods in modern literature for the prognostication of crisis was proposed by Beaver

(Panayotov & Borisov, 2001). Studying the company as a reservoir of liquid funds he assumes that this reservoi

can be used as a cushion to take up blows from different fluctuations. For the purpose of forecasting of th

occurrence of a crisis situation Beaver proposes that an eye has to be kept on the following correlations:

debts/working capital; cash receipts/liabilities; debts/assets; debts/income.According to this method the danger of crisis is increasing when the coefficient debts/working capital i

high, when the receipts are decreasing, and the total amount of liabilities is growing, etc.The method developed by Ed. Altman on the basis of empirical observation known as linear discriminan

analysis also provides an ability for the prediction of crisis. Under this methods the so-called Z-score the poin

of bankruptcy is calculated with the following formula: (Panayotov & Borisov, 2001)

Z = 0,012 1+ 0,014 2 + 0,033 3 + 0,0064 + 0,999 5 (1)

where:

1- working capital/total assets;

2 retained earnings/total assets;

3 earnings before interest and taxes/total assets;

4 - equity/debt capital;

5 - turnover/rate of turnover of assets,

According to Altmans method:

if z > 2,99 the company is financially sound

when z < 1,81 the company experiences serious financial difficulties.

For the prediction of crisis occurrence Hofer proposes the calculation of a general assessment of the curren

strategic health covering the observation of four groups of indicators: 1. Strategic market positions, 2. Strategic

technological positions, 3. Strategic production resources, 4. Strategic financial health. (Hofer, 1995) The four

groups of indicators are assessed at three levels: weak, medium, strong. The scheme proposed by Hofer for the

performance of such an assessment is presented in Table 1.

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Table 1. Assessment of the current strategic health of the company

Assessment of the current strategic health of the company

Criteria Weak Medium Strong

STRATEGIC MARKET POSITIONS

Relative individual attractiveness Low Medium High

State of production-market evolution(life cycle)

High cost of change ofposition

Medium cost of change ofposition

Small cost of changeof position

Relative market share Small Medium High

Distribution systems Quickly changing Slowly changing Without change

STRATEGIC TECHNOLOGICALPOSITIONS

Concepts of a new product Chasing Medium Leading

Improvement in new products

Product modifications

Improvement of processes

STRATEGIC PRODUCTION

RESOURCESPositions on the experience curve Chasing Medium Leading

Strategies as per experience curve Inconsistent Partially consistent Consistent

Novelty of plant and technologies Old Medium age New

STRATEGIC FINANCIAL HEALTH

Long-term investment needs in relationto internal resources

needs > available funds +debts

needs = debts + availablefunds

receipts < needs

Long-term growth in relation to desiredindicators

Goals < growth % indicators = growth Growth % higher thanthe goals

In our opinion for the prognostication of potential crisis phenomena it is also expedient to apply the expres

analysis of the typical features and availability of documents required for the company successful functioning (see

Table 2).(Chernyavskiy, 2006)

Table 2. Prognostication of crisis phenomena by the means of express analysis

Indicator Pre-crisis

situation

Crisis

1 2 3

Absence of current and operating plans + +

Absence of financial management + +

Company structure

-traditional, generally adopted - +

-unsystematic + +

Portfolio of orders:

-availability of current period - +

-availability of perspective - -

Management style:

-authoritarian + -

-democratic - -

-populist + +-liberal + +

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Problem solution method:

-traditional, mechanical - +

-absent or unsystematic + +

Method of business communication:

-formal - +

-incidental + +

Availability of innovations:

-as per strategic plan - -

-absent + +

Availability of investments:

-as per strategic plan - -

-absent + +

Special preparation of managers of crisis situations management:

-present - -

-absent + +

Availability of security reserves, resources:

-available - -

-absent + +

Remark. The + symbol shows a possible development of crisis processes and situations.

According to some authors the express analysis can be extended depending from the particular activity o

the analyzed company, its size and other factors important from the position of the specialist performing

analysis. (Marenkov & Kasyanov, 2004)The presence or absence of strategic and current plans, of pre-crisi

management are also analyzed, as well as the grade of preparedness of the managers and staff for work in crisi

situations; the managers and staffs skills to use the methods of pre-crisis and crisis management, availability o

absence of a system for monitoring of the external and internal factors; presence or absence of a team of manager

for crisis situations management; the nature of intergroup and interpersonal relations and other indicator

depending on the specificity of the company.The US research worker I. Ansoff developed a classification of the typical features of analysis of crisis

situations (, 1989) It is presented in tables 3, 4 and 5 and shows the experience of the US specialists in th

issues of crisis situation management taking into account the attitude of mind of the US population. We believe

that this experience can be taken and partially used by the Bulgarian companies taking into consideration th

specific circumstances and the attitude of mind of the workers and employees of the particular company.

Table 3. Financial & production activity

Phase of decline of activity, development and occurrence of a crisis Degree of

threat

Decrease of income

Absence of new production programsWear of equipment and machinery

Occurrence of first losses

Production programs becoming out of date

First overload of production

Substantial loss to which no attention is paid by the managers

Discharge of workers and decrease of orders

Failures and breakdown of machinery and equipment V

Considerable loss

For the prognostication of the potential crises in the company it is expedient to perform an express analysis

of the typical features, too, in order to define the type and gravity of the crisis situation. To that end a system of

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methods is used under which the state of the company is analyzed according to the typical indicators through the

method of comparison with the relevant norms. The express analysis provides an opportunity to identify the crisi

and to determine the directions of profound analysis. This analysis data are preliminary. (Chernyavskiy, 2000

Krutko, 1994) For the express analysis data of financial and economic analysis of the company are used, as wel

as own and foreign experience. (Stoilova, 2009)

Table 4. Characteristics of the activity of the company managers

Phase of decline of activity, development and occurrence

of a crisis

Degree of threat

Absence of strategic goalsImperfect management

Irrational use of labor resources

Struggle for power instead of cooperation

Internal conflicts, misunderstandings

Absence of initiatives for introduction of changes into thesystem of management and production Complacency andindifference

Anarchy, bad attitude to ordering parties V

The liquidity indicators are quantitative characteristics of the company ability to pay off its current liabilitie

with the short-term assets available. (Korotkova, 2000) The company is considered liquid if the general liquidity

ratio is greater than 1,2 and inefficient if the general liquidity ratio is smaller than 0,2. The ratio of provision with

own funds has a recommended value greater than 0,1. In accordance with the generally accepted system o

methods a company is defined as insolvent if the value of the ratio of provision with own funds is smaller than

0,1. This regulates the formation of the capital goods on the account of the own funds to the amount at least 10 %

of the equity. If both indicators are beyond the frames of the norms in future it should be checked for the presence

of a crisis of liquidity. The crisis of liquidity is proposed to be identified beyond the ratios of autonomy or

absolute liquidity, and the use of a norm of the current liquidity ratio is proposed as well.

Table 5. Characteristics of behavior of collaborators

Phase of decline of activity, development and occurrence of a crisis Degree of threat

Insufficient qualification, misunderstandings in regard to collaborators competence

Non-constructive influence by the part of the managers

Dismissal of qualified collaborators on the recommendation of managers or collaborators

Increase of influence of workers showing servility for the managers

Complacence of collaborators-mediatorsStopping the chances for the company further development through looking for objectivefactors and guilty persons

Punishing the increase productivity of work

Worsening of moral climate within the team

Occurrence of a mood of hopelessness at all levels IV

Thefinancial autonomy ratio characterizes the degree of financial independence of the company in regard

to creditors and is directly related to the general solvency ratio. A company is financially stable if the financia

autonomy ratio is greater than 0,5. The absolute liquidity ratio has recommended values equal to 0,2....0,3.

The next stage of the analysis of the company state is the check for the presence of a crisis of results. Thi

condition is characterized by the following three indicators: net sales ratio, presence of operating loss, drop in

dynamics of change of the ratio of provision with reserves. (Kinney, 2001) The recommended value of the ne

sales ratio is greater than or equal to 1,0. The crisis of results is characterized by the presence of loss (sometimes

even inessential) and constant increase of the credit and debit indebtedness. If the mentioned indicators are no

within the frames of accepted norms, then the company should check for the presence of a strategic crisis. The

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strategic crisis in express analysis can be identified by the means of analysis of dynamics of changes of genera

profitableness, dynamics of changes in assets turnover and the amount of sales.

The profitableness indicators provide the most synthesized characteristics of company efficiency. Th

profitableness is a positive quantity if the financial result is profit and shows the rate of return on capital. When

the financial result is loss the profitableness indicators are negative quantities and show the rates o

decapitalization of the company. (Marconi, 1992) The greater the reserves turnover ratio is the smaller is th

amount of assets activated in this least liquid group. A particular pressing issue is the increase of turnover anddecrease of reserves in the presence of a particular indebtedness on the side of the liability of the company. If al

the mentioned indicators are within the frames of the accepted norms the company is considered sound.

Table 6. Identifying the crisis in a company according to the indicators for the year studied.

IndicatorStrategic

crisis

Crisis of

results

Liquidity

crisis

Bankru

ptcy

General liquidity ratio Rgl

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peculiarities the strength of crisis impact can be decreased. The information collected for prognostication of crisi

phenomena in the company can be used as initial data for the development of a strategy to overcome the crisis.

References

1. Ansoff I., (1989). Strategic Management. Moscow.2. Chernyavskiy. (2000). Anti-crisis Management. .:UP.3. Chernyavskiy. (2006). Anti-crisis Management of Enterprises..4. Hofer C. & Shendel D. (1995). Strategy formulation. Analytical Concepts. St. Pail.5. Kinney J. (2001). Developing a Crisis Management Strategy. MPA.6. Korotkova M. (2000). Anti-crisis Management. Infra-M. Moscow.7. Krutko V., (1994). Introduction to Management of Crisis Situations..:ZUUP.8. Marconi J. (1992). Crisis marketing: when bad things happen to good companies. Chicago. American Marketing

Association.

9. Marenkov L., Kasyanov V. (2004). Anti-crisis Management. M. Rostov n/D.10. Panayotov D., Borisov B. (2001). Strategic Planning. Svishtov.11. Stoilova D. (2009). Financial Management. Blagoevgrad.

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