Study Of Dynamic Financial Early-warning System Based On Cash Flow

Under the condition of market directed economy, competition is becomingincreasingly fierce, and uncertain factors in the environment are also growing. As aresult, enterprises are facing more and more risks. Risks bring excess profit forenterprises, as well as huge challenge. Once the enterprise manages carelessly, it willbe put in a tight spot of business crisis and financial crisis, and even the bankrupt.Building financial early-warning system to detect signs of financial distress, and topredict crisis hidden in the process of production and operation is very important. Itwill help the enterprise take timely prevention and response measures, to minimizethe adverse impact of risks on the enterprise and to avoid the enterprise getting itselfinto trouble. However, the current study on financial early-warning system is mostlybased on accounting information in principle of accrual basis, which restricts theability to reveal actual operating conditions of enterprises. In addition, traditionalearly-warning system often only focuses on the static analysis of cross section datawhich can’t reveal the gradual deterioration of crisis, and it also emphasizes theconstruction of complex mathematical model excessively which increases thedifficulty of implementation and influences the actual application effect. From herewe can see that it is imminent to explore and build scientific and practicalearly-warning system which has reliable information base and can monitor theoperation of the enterprise dynamically.In view of the problems existing in the current research of financialearly-warning system, the paper introduces the fundamental of building financialearly-warning system on the basis of dialectical analysis on the results of previousstudies. And the paper also builds a comprehensive dynamic financial early-warningsystem based on cash flow which is filled up with new connotation of “cash flowperspective”,“non-financial index system” and “dynamic warning”, in order to revealthe financial situation and sustainable business capacity of the enterprise actually, aswell as the origin and the mechanism of financial risks. The new financialearly-warning system can reflect the gradual process of crisis evolution and achievethe unification of scientific, reliable and practical early warning which will providetheory and method reference for the enterprises’ financial early-warning management.In order to fully display the building process of dynamic financial early-warning system based on cash flow, the paper selects CHINA ERZHONG GROUP (DEYANG)HEAVY INDUSTRIES CO.,LTD. as a case study, which can verify thescientificalness and practicality of the new early-warning system. Firstly, this paperconstructs a comprehensive financial index system based on cash flow from fouraspects which are debt paying ability, profitable ability, development ability andmixed ability after preliminary identification of the case enterprise’s internal andexternal risk factors. Secondly, the paper analyzes the case enterprise’s financialsituation from2009to2011using systematic analysis method and analytic hierarchyprocess, which determines that the financial risk of the case enterprise has reached“great alarm” level and presents obvious worsening trend. Thirdly, this paper makesfurther efforts on analysis of the case enterprise’s non-financial index dynamicallyand systemically, which helps judge the origin and the deterioration of the alarm.Lastly, the paper offers recommendations to the case enterprise from two aspects ofshort-term removing alarm and long-term preventing alarm, which can security thecase enterprise to reduce financial risks as soon as possible to achieve performanceimprovement and long-term development.The outstanding characteristic of the new dynamic financial early-warningsystem based on cash flow is that it builds dynamic financial early-warning systemfrom the perspective of cash flow which pays more attention to the continuousoperation ability of enterprises and can reveal the dynamic process of gestation anddevelopment of financial risks. Besides, the new system can achieve early warningneatly and efficiently, so it is suitable for the practical application of enterprises. Inaddition, the non-financial index is embedded into the early warning system in thisstudy, realizing effective cohesion of the cause and the effect, which contributes toidentifying the root causes of problems to prevent and remove alarm fast andefficiently. Moreover, this paper gets rid of the thinking of building model just for themodel. To the contrary, it uses systematic analysis method and analytic hierarchyprocess to introduce qualitative factors into quantitative study, which can simplify theconstruction and application process of the financial early-warning system; as a result,it can better meet the needs of enterprises’ practice and enhance the feasibility andeffectiveness of the early-warning system.