Avoiding corporate collapse: Using financial and non-financial indications effectively

Abstract

Purpose

This paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies.

Design/methodology/approach

This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context.

Findings

Using financial and non-financial indicators in combination represents the most effective approach to identifying emerging problems within companies.

Originality/value

The briefing saves busy executives, strategists and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.

Citation

Whitfield, R. (2018), "Avoiding corporate collapse: Using financial and non-financial indications effectively", Strategic Direction, Vol. 34 No. 11, pp. 7-8. https://doi.org/10.1108/SD-07-2018-0159

We are living in turbulent times and the corporate world is grappling with the challenges (and opportunities) this presents. Whilst we have seen the swift rise of some organizations, we have likewise seen huge numbers of companies – often companies with long and proud histories - going to the wall. We have seen governments having to bail out huge names in the banking industry at massive cost to the people in the street.

The warning signs

The ability to identify those companies that are on the downward spiral towards destruction clearly has some value. If we can figure out what sorts of factors act as indicators of a firm on this path then these can perhaps act as warning signs to others – potentially warning signs that can lead to remedial action to turn the situation around and maybe in future save some organizations from oblivion. Awareness within a firm of these indicators – alongside effective processes within the organization– may enable it to rectify its own developing problems.

Financial elements such as profitability are obviously key signposts in this respect. Similarly, non-financial aspects like the make-up of the board and the level of experience in the higher echelons of the business are important pointers also. Purves and Niblock (2018) set out to discover the value of non-financial elements in flagging up emerging problems and whether the two elements – financial and non-financial – when considered together provide a solid litmus test to identify firms on the path to prosperity or demise.

The authors focused on a series of firms in the farming, property, manufacturing and financial sectors in the USA and Australia. The intention being to assess whether their approach was valid in different parts of the economy and in different nations. They focused on 24 companies over a 5-year period from 2004 - half of which failed. The firms were listed in either the Australian Securities Exchange or the New York Securities Exchange. Success or failure being defined by whether the firms remained listed and profitable. Both the countries studied have suffered from high numbers of corporate failures. The two countries have a good deal in common – not least in the sense that US firms in these sectors have a tendency to set up in Australia and vice versa. Yet there are many differences – such as legislature – to provide challenges to a non-domestic firm. All interesting reasons for this focus on the US and Australia.

Non-financial indicators show first

The authors came up with some interesting results. There were clear differences between the successful and unsuccessful firms in terms of both elements of finance and in terms of the other aspects of the way the firms were run. Moreover, the latter non-financial elements tend to come to light ahead of the former. Indeed, logically, the non-financial elements misfiring in the organization will ultimately negatively influence the financial performance of the company. We are looking for the earliest possible indication of trouble on the horizon so this is important.

Key non-financial factors

The sorts of non-financial elements which were common to unsuccessful firms in both the countries studied were:

• Lack of attention to corporate strategy – i.e. where there is a failure to deliver on any aspects of the company’s declared objectives, nothing is done to address it;

• elements related to the Board of Directors such as the high proportion of Executive versus non-Executive Directors; and

• lack of experience at the highest levels in the organization.

Takeaways

So what can we learn from this? Well firstly it is clear that the standard financial information on the firm’s profits, assets and so on obviously have a part to play. However, using these alone can lead to problems. For example, the way such measures are approached can vary across sectors and across different countries – this presents difficulties when trying to compare the performance of various firms. If we are to spot problems as early as possible then we should take a broader view of the firm’s health (or otherwise). Put the two aspects together and you have a solid assessment of where the organization is heading. The authors call this combined method of assessing corporate health an “integrated multi-measure “approach and their results indicate that it provides a more effective assessment than either of the individual measures – financial or non-financial – taken in isolation.

Why should we care? The cost of corporate failure is huge in every sense of the word – in terms of wealth but also in terms of people’s lives. More accurate and early identification of impending difficulties can help not only to avoid corporate failure but also help to avoid abrupt and severe short term measures which are not actually beneficial to the long term development of the company. In this sense this research should be of great interest not only to those managing companies but also to those in involved in financing them and indeed those in the public sector dealing with the fallout from corporate collapse.

Comment

This review is based on "Predictors of corporate survival in the USA and Australia: an exploratory case study" by Nigel Purves and Scott J. Niblock published in Journal of Strategy and Management.