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PROGNOSTICATION OF CRISIS PHENOMENA IN THE COMPANY

Milena Filipova
Southwest University N. Rilski, Bulgaria, emili2000@abv.bg

Abstract
The 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 their occurrence. That determines the significant part of crisis phenomena prognostication in the management of crisis 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 and comparison. 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 information regarding the potential threats. As a rule this information is incomplete and fragmented. It can be the first alarm 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 cyclic recurrence 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 US research-worker Ansoff and the system of methods of express-analysis of the typical indicators. In regard to the business the crisis is a period of instability, a situation in which serious changes occur. The changes outcome 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 crisis phenomena in the company and their role in reducing the crisis grade and power of influence. The motive of research to this direction is the understanding that the prognostication of crisis situations and phenomena is of a major significance for the development and implementation of the least hazardous management solutions that would contribute to the achievement of the anti-crisis goal adopted and to obtaining of a result with the minimum use 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 it is first necessary to organize the process of receipt of true information in regard to the potential threats. That information is frequently incomplete and fragmented. It can be the first signal for the possible occurrence of a danger or a crisis situation. In this context the company should perform monitoring of the external and internal 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 theoretical aspect of the potential threats, and namely the cyclic recurrence of crisis in industry according to the theory of 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 1wave. 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 occurrence 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 the decrease of profitability, undertaking of measures for stabilization (introduction of innovations, rationalization of 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 reservoir can be used as a cushion to take up blows from different fluctuations. For the purpose of forecasting of the 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 is 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 discriminant analysis also provides an ability for the prediction of crisis. Under this methods the so-called Z-score the point of bankruptcy is calculated with the following formula: (Panayotov & Borisov, 2001) Z = 0,012 1+ 0,014 2 + 0,033 3 + 0,006 4 + 0,999 5 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 current 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.
(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 STRATEGIC MARKET POSITIONS Relative individual attractiveness Low Medium State of production-market evolution (life cycle) Relative market share Distribution systems STRATEGIC TECHNOLOGICAL POSITIONS Concepts of a new product Improvement in new products Product modifications Improvement of processes STRATEGIC PRODUCTION RESOURCES Positions on the experience curve Strategies as per experience curve Novelty of plant and technologies STRATEGIC FINANCIAL HEALTH Long-term investment needs in relation to internal resources Long-term growth in relation to desired indicators High cost of change of position Small Quickly changing Medium cost of change of position Medium Slowly changing Strong High Small cost of change of position High Without change

Chasing

Medium

Leading

Chasing Inconsistent Old

Medium Partially consistent Medium age

Leading Consistent New

needs > available funds + debts Goals < growth %

needs = debts + available funds indicators = growth

receipts < needs

Growth % higher than the goals

In our opinion for the prognostication of potential crisis phenomena it is also expedient to apply the express 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 1 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 + + + + + + + + + Pre-crisis situation 2 + + Crisis 3 + +

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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 of 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-crisis management are also analyzed, as well as the grade of preparedness of the managers and staff for work in crisis situations; the managers and staffs skills to use the methods of pre-crisis and crisis management, availability or absence of a system for monitoring of the external and internal factors; presence or absence of a team of managers for crisis situations management; the nature of intergroup and interpersonal relations and other indicators 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 the 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 the 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 Decrease of income Absence of new production programs Wear 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 Considerable loss V Degree of threat

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 474

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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 crisis 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 well 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 Absence of strategic goals Imperfect management Irrational use of labor resources Struggle for power instead of cooperation Internal conflicts, misunderstandings Absence of initiatives for introduction of changes into the system of management and production Complacency and indifference Anarchy, bad attitude to ordering parties Degree of threat

The liquidity indicators are quantitative characteristics of the company ability to pay off its current liabilities 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 of 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 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-mediators Stopping the chances for the company further development through looking for objective factors 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 Degree of threat

IV

The financial 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 financial 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. This 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 net 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 not within the frames of accepted norms, then the company should check for the presence of a strategic crisis. The 475

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strategic crisis in express analysis can be identified by the means of analysis of dynamics of changes of general profitableness, dynamics of changes in assets turnover and the amount of sales. The profitableness indicators provide the most synthesized characteristics of company efficiency. The 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 of decapitalization of the company. (Marconi, 1992) The greater the reserves turnover ratio is the smaller is the amount of assets activated in this least liquid group. A particular pressing issue is the increase of turnover and decrease of reserves in the presence of a particular indebtedness on the side of the liability of the company. If all 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.
Indicator General liquidity ratio Rgl<1.2 Ratio of provision with own funds Rpor<0.1 Autonomy ratio R<0.6 Current liquidity ratio Rcl<1.4 Absolute liquidity ratio Ral<0.2....0.3 Net sale ratio Rns>0.1 Presence of loss Credit indebtedness Debit indebtedness General profitableness ratio Ratio of capital goods turnover Sales amount Analysis results Strategic crisis Crisis of results Liquidity crisis Bankru ptcy

Table 6 can be used to identify the crisis in the company. Comparing the indicators of the company to the norms and taking into account the presence or absence of a loss, one can determine the state of the company and identify the presence of a crisis in it. If the indicator is equal to the normative one or is smaller than it, the current condition of the company is established in advance.

Conclusion
The methods of prognostication of crisis phenomena in the company studied herein are directed to analyzing various ratios and indicators. Beavers method studies the ratios of debts/working capital, cash receipts/liabilities, debts/assets, and debts/income. The method of Altman calculates the point of bankruptcy. The method of Hofer studies the indicators of strategic market positions, strategic technological positions, strategic production capacities and strategic financial health. With the express analysis the typical features are analyzed along with the availability of documents required for the company successful functioning, the presence or absence of strategic and current plans, of pre-crisis management are also analyzed, as well as the grade of preparedness of the managers and staff for work in crisis situations, the managers and staffs skills to use the methods of pre-crisis and crisis management, availability or absence of a system for monitoring of the external and internal factors. For the express analysis data of financial and economic analysis of the company are used, as well as own and foreign experience. Ansoffs classification of the typical features of crisis situation analysis covers the financial and production activities, the activities of the company managers and the behavior of the collaborators. The studied methods of prognostications of crisis phenomena in the company provide an opportunity to identify the crisis and to determine the channels of a more thorough analysis. The prognostication of crisis phenomena in the company can help prevent or alleviate the stage of shock caused by the crisis, and to contribute to reducing the duration of this stage and to accelerating the adaptation and stabilization of the company in the crisis situation. With prognostication of the crisis phenomena in the company and with the consideration of their 476

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peculiarities the strength of crisis impact can be decreased. The information collected for prognostication of crisis phenomena in the company can be used as initial data for the development of a strategy to overcome the crisis.

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

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