A Study Of Cash-flow-based Financial Distress Early-warning Model For China Listed SMEs

With the rapid development of China’s market economy, Small and MediumEnterprises (SMEs) which develop with high speed recently, play an important role innational economy. However, compared with large-sized company, the majority oflisted SMEs are exposed to an increasing number of risks and competitions, majorly,cash flow problems. Many SMEs all around the world were stuck in a vulnerablesituation after the2008world economic crisis, influencing the recovery pace of thewhole economy. Thus, it is imperative that a sound and reliable set of indicators,particularly cash flow based, be not only identified but also established to investigatethe survivability of Chinese SMEs and provide them with signals to get prepared.The study aims at re-identifying those SMEs with financial distress using“EBITDA/(interest expense+financial expense)”; developing a cash flow-basedfiscal distress prediction indicators specifically for the listed SMEs according to theirunique characteristics; to examine if they can reflect the financial condition of SMEcorrectly, and use them to build up the final prediction model. It is found that thedefinition suits SMEs very well and11ratios have significantly different performancebetween those two groups of companies, the model may make a prediction of theirfinancial condition3years in advance with an accuracy of70%.It is expected that the study may help create a new and unique way for SMEmanagers to reconsider its financial condition, and provide good reference for boththe study of SME financial distress early-warning and the practical use of cash flowratios for SME managers in the near future.