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Spotting the early warning signs of a company’s impending financial collapse
An investigation into how the systematic monitoring of a company's news coverage can enhance more traditional financial monitoring techniques.
LexisNexis and State of Flux have conducted a case study based research project looking at 23 failed companies since 2008. The research analyses more than 90,000 news articles written about the companies in the run up to bankruptcy and uses specific Smartindexing terms to identify trends in companies that are at risk of failure.
Using this methodology, LexisNexis and State of Flux were able to identify early warning signs of risk in more than 80% of the sample companies researched. In more than half of the companies researched, the early warning signs were either 'strong' or 'very strong'. Warning signs could be clearly seen six months before companies reached bankruptcy and these signs became more pronounced the closer the companies got to failure. Critically, the pattern of early warning signs was unique to failing companies and not seen in a sample of healthy companies, providing confidence that the methodology would not generate significant issues around false alerts.
What This Means For Mitigating Risk
When applied to the management of future risk, the LexisNexis/State of Flux methodology provides insight for companies on the financial state of their suppliers and customers by the ongoing monitoring of highly relevant and focussed news and content,
against relevant terms. This enables supply chain managers and account managers to identify, in advance of a business failing, key indicators that suggest suppliers and customers are at risk. New companies can be added to the content monitoring platform as they emerge, either as a new customer or supplier or as their importance to the business increases. LexisNexis and State of Flux have jointly prepared a White Paper, outlining the methodology behind this research and its implications for identifying business risk in a timely manner.
Who Should Read The White Paper?
- CFOs and Finance Directors
- Supply Chain Directors, Procurement Directors and others involved in relationships with suppliers
- Directors of Sales and Business Development and others managing relationships with customers
- Risk Managers