The Study On Early Warning Of Financial Risk Based On Free Cash Flow

The enterprises are now facing more and more opportunities in this increasingly competitive market environment. In the same time, more and more uncertainty follows. Financial risk, which can’t be avoided by enterprises in the process of financial management exits objectively. In order to improve the viability and competitiveness, enterprises should identify, analyze and avoid the financial risk in advance. Therefore, it makes significant sense to do research on the early warning of financial risk.In the research on the early warning of financial risk, most early warning indexes come from balance sheet and income statement. The traditional financial indexes, based on accrual basis, are unable to accurately reflect the result of cash management. What’s more, these indexes need to deal with a lot of ambiguities and uncertainties. So the manipulation of accounting earning happens. Although the cash flow indexes on cash basis can make up the shortcomings of traditional financial indexes, both treat financial risk on basis of the “liquidation hypothesis” ignoring “going-concern” as a presupposition. Free cash flow is on the going-concern basis and not only considers the current capital requirement but also the future necessary investment and expenditure of the enterprise. Therefore, this research bases on free cash flow to build pre-warning model for the financial risk.On the basis of theory of financial risk early warning, this study builds early warning indexes system in terms of free cash flow indexes because of their advantages. Then statistical software SPSS20.0 is applied to test the normal distribution and significance of the indexes. Then the Logistic regression model is built to pre-warn the financial risk followed by back substitution and selecting new sample to test model fitting. At last, this study puts forward several precautionary measures for financial risk according to results of empirical analysis.