Research On The Model Of Cash Flow Risk Assessment Of Growth Companies

Risk assessment is always an important part of the internal control within a company. It is of great significance for the stakeholders to find a way to assess the risk with early warning. Growth companies always attract more attention and are expected to run better in the future. Either through the increase in assets or more and more income, this kind of companies show the growth characteristics during the past few years. Under the steady growth, the support of cash flow is essential for the companies growing further. Also, the crack of capital chain is the "trap of growth" that the companies are facing. Therefore, this paper rooted on the growth companies tries to design a model to assess the risk and provide risk pre-warning during a company’s growing process. This paper mainly focuses on the following four aspects.Firstly, this paper provides the related research results in the aspect of financial distress or cash flow risk and finds that the research themes focus more on the financial distress rather than the cash flow risk. In the accounting area, the symbolic research methods include the single factor discriminant analysis presented by Beaver(1966) and the Z-score model provided by Altman(1968). After that, some other analysis methods are applied in the risk prediction aero, such as the Logistic model, Artificial Neural Network Model and so on. Mostly, the cash flow information is used as independent variables to predict the probability of operation failure. In the field of financial management, although there are many papers on cash flow, the amount of papers researching into the cash flow risk is limited. The existed researches mainly debate the fluctuation of cash flow based on the definition of risk. And this paper holds that the researches of cash flow risk should be based on the capital chain, considering both the supply of cash and demand of cash.Secondly, based on the business process, through analyzing the causes of cash flow risk in a company, this paper proposes that the cash flow risk should be measured from the perspective of the capital supply and capital demand in a supply chain. According to the financial indicators and cash flow indicators, the growth companies are defined as the companies that show the growth characteristics in continuous three years (for the newly listed companies, the period could be shorten as two years). The method to calculate the total cash supply and total cash demand derived from the financial identical equation in the business. Combined with the realization of current assets in the future, this paper uses the supply-demand ratio to distinguish the risk degree of the companies. Then divide the degree of the companies’cash flow risk in the yeart-1 into three categories:danger, attention and safe. The "dangers" include those companies that are warned to be delisted from the stock market in the year,, the companies in the yeart-1 with the supply-demand ratio less than 1 and the percentage of account receivables and other receivables aged above 2 years amount to more than 50%, and the companies with the percentage of account payable aged above 1 year amount to more than 50% and the main reason to delay the account payable is for lack of money. Beyond the "dangers", the "attentions" include the companies that the supply-demand ratio is less than 1, and even though the supply-demand ratio is not less than 1, the companies’ percentage of account receivable aged above 2 years is more than 50%. Beyond the "dangers" and "attentions", the "safes" are defined.Thirdly, after classifying the cash flow risk, this paper tries to find a way to alert the danger of the companies’ cash flow situation. By analyzing the factors that influence the cash flow risk of the growth companies,34 financial indicators from the aspect of stakeholders and fundamental level are picked in the yeart-2 to predict the cash flow risk in yeart-1. Given the progressive increase in the cash flow risk degree, this paper applies the ologit-model to build the cash flow risk prediction model. Nine financial independent variables pass the examination to build the model and the regress results are of significance. Among the 9 independent variables,4 variables that represent the stakeholder indicators, including the ratio of account receivable aged in 1 year, procurement share of the top five suppliers, the current ratio, the return on equity, the current financial debt ratio and 4 fundamental indicators including the ratio of cash from the financing activities, the growth rate of total assets, the growth rate of income and audit opinion show better statistical significance. Both the model-built sample and examination sample are applied to check the model effectiveness. The misjudgment rate for the model-built sample is 23.6% while the same rate for the examination sample is 34.9%. It shows that the whole discrimination rate is satisfied, even though it indicates that the model tends to underestimate the probability of the companies into cash flow risk.Fourthly, given the problem that appeared during the building of the model, this paper puts forward the future research point technically and theoretically. Technically, improve the efficiency of the model applied in the prediction of failure; for example, apply the factor discriminant analysis to keep more independent variable information to enhance the universality of the model. Theoretically, deepen the research of the theory of the capital chain to find out the transmission of the cash flow risk.The contribution of this paper lies in that the paper puts forward a new method to classify the degree of different companies’cash flow risk. That is to consider both the present and future cash flow apply-demand situation, combined with the realization of the current assets, and divide the companies into three categories. Use the ologit regression model to regress the financial indicators and the degree of the companies’cash flow risk to find out the significant indicators to predict the cash flow risk, which will be helpful to the precaution of a company’s failure. This will also enhance the effectiveness of the cash flow indicators in predicting the financial risk.