In compliance with European regulations, the new Italian “Insolvency Code” in- troduced new tools to prevent future financial crises in businesses (“early warnings”). Their aim is to highlight future insolvency issues, to enable timely action in order to avert the potential crisis for as long as possible.
This mechanism will come into force on 15 August 2020. Based on a previous investigation that identified the most sensitive financial ratios for evaluating a going concern, this study proposes and tests a possible approach which combines generic quantitative indicators with a case-by-case solution. A discriminant analysis was made on a pairwise sample of Italian non-listed small and medium-sized companies (SMEs). The proposed model overcomes the problem that arose from a combined interpretation of the indicators, and also it acts as a tool that can determine the level of risk within each situation. This approach aims to limit the rigidity produced by common quantitative thresholds, thereby reducing false positives and negatives, en- suring an automatic reporting process that can preserve the efficiency of the early warning mechanism. Furthermore, our proposal is better suited to SMEs, since it is based on financial statements rather than forecasts.
Keywords: insolvency, crisis, financial indicators, early warnings.
Bava, F., Cane, M., di Trana, M. G. (2020). Can a quantitative approach be mitigated? Proposals for the application of the “early warnings” required by the new Italian Insolvency Code, Financial Reporting n.2, pp. 33-61