**4. Possibilities for risk assessment**

234 Risk Management – Current Issues and Challenges

the dates from table 2.

**Table 2.** The Matrix of possible situations

These probabilities can be identified, but, the recorded results do not appear at the same time also at the level of all variants. For instance, at a bowling competition, you can strike down between 0 and 6 skittles (there are 7 possible results), but only after the throw you will clearly know their number, without being possible recording in the same time two variants. The question is however to assess the probability of the results to action. In the case of discrete variables, things seem simple; the evaluation is possible by reporting favorable variations at the number of possible cases. For example, consider an economic agent who has an order for making furniture for at least one piece of each, but with a higher production capacity. In this context, he would like to know what is the probability to charge a minimum amount of 3000 euro from the sale of the goods mentioned, knowing that the unit price of sale is 500 euro for product X and 300 euro for product Y, and the quantity that can be offered for sale is of 5 pieces of each product. To identify favorable situations, are followed

Given the minimum amount targeted and unit sales prices, the favorable situations are represented by the following cases: (3X, 5Y) (4x, 4y) (4X, 5Y), (5X, 2Y) (5X, 3Y); (5X, 4y), (5X, 5Y). As a result, there are 7 favorable cases from 25 possible. The probability of obtaining the amount targeted is 7/25 = 0.28. Certainly, the example considered is simple, but we took into consideration highlighting a case that allows a quick estimate of the probability of recording a desired situation. And in the case of continuous random variables, the probability theory gives the theoretical foundation for identifying the possibility of manifestation of a situation. It cannot be questioned the result of applying these mathematical methods for assessing the probability of outcomes to appear. And still, we must consider the following aspect: how many managers know the probability theory, are willing to apply it and are convinced that they can use it in any case, according to the level of complexity of the factors that can influence the work done? If it would be made a survey in Romania, especially at the level of

Moreover, the risk management issue in our country has acquired a well-defined contour in a recent period, the researches performed being divided and the simple and the legislation is insufficient and permissive. In addition, although the manifestation of a result can be anticipated through these rational methods, even the term used, "probability" "shows that the activity of the economic agents cannot be translated into logical terms to quantify some uncertain aspects. Also, the use of some statistical data for sizing the probability of the appearance of a phenomenon allows obtaining relevant results when reporting to a large

small and medium organizations, the percentage would be extremely low.

number of different cases that are not interrelated.

Is risk identification sufficient to determine a course of action so as to avoid or minimize losses? Obviously, the answer is no. An important aspect of risk management is represented by dimensioning its size so that there can be evaluated the effects generated by its manifestation. In general, risk quantification starts from certain assumptions:


On any business, the activity is reported on the components, differentiated in relation to the business established at its set up. Considering an economic agent engaged in the activities of production and marketing, we can identify and assess major risks that may occur in the economic, financial, investment and trade area. For this, it is imposed stating the possibilities of capital (Figure 2).

This structure allows capital allocation process targeting specific risk assessment activities of the two components. As a consequence, we shall report to the main risk categories that action at the level of each component.

Running operating cycle determines both revenue and expenditure, activity level all affect profitability. Obviously, these are uncertain and do not remain unchanged from one period to another. The revenue is subject to combined influence of several factors: the volume of production conducted, quantity sold, market demand, sales price. The level of expenses acts on profitability both through the volume and the structure. Thus, a high level of fixed costs will pose a risk for a major operating company. It will be even greater as the sales volume will be lower, the fixed costs will be higher and the output will be made near the critical point (that level, on account of production or profit made are not recorded, no loss). The economic theory offers solutions for the determination of the point where the developed activity does not generate any profit or loss and the economic realities have shown a tendency of bringing forward the growth rate of expenses of the corresponding increase in production due to higher labor productivity, improving the organization of work or assimilation of technical progress. In addition, the increase in the level of production leads to a lower cost per production unit, the allocation base for fixed costs being higher. In this context, companies which registered a high level of fixed costs are much more exposed to risk than those who have a high share of variable expenses. For the operational risk assessment the operators can monitor the level of turnover compared to breakeven. From the surveys conducted it emerges the idea that a difference between them up to 10% reflects an unstable situation, between 10 and 20% - a relatively stable situation and over 20% a comfortable situation. Also, another indicator that allows sizing the operating risk is the operating leverage which reflects the percentage increase of the operating result due to the increase by one percentage of sales.

Risk Management in Business – The Foundation of Performance in Economic Organizations 237

**Table 3.** Potential risks associated to the operating activity

purpose, net cash flows, residual value and the discount rate [8]

One of the most important decisions at the micro-economical level is the allocation of capital for the course of the investment processes because they reflect the performance of current costs in order to achieve future revenue. So, the quantity of resources allocated for the investment achievement can determine their success and the business development. Real investments, embodied by essential assets for the development of the production and sale processes, are the subject of differentiated risks, the ability of managers in the selection of projects that ensure the maximization of the economic agent value being essential. To substantiate the investment decision, the practice imposed certain elements that allow the sizing of the efficiency of the analyzed project, namely: the amount of invested capital, life of

The criteria that can be applied to analyze the investment project must relate to an uncertain environment because a certain environment does not exist in reality. Building some models on the assumption that future cash flows are certain, it has an explanatory nature. In a deterministic economic and social environment is assumed the previous and certain knowledge of the interest rate and future monetary flows of the investment projects. Possible variations in interest rates and the risk of an improper activity, that of achieving breakeven (the dead point) and/or to become insolvent and to go bankrupt are not included in the calculation base for the investments efficiency. As a result, the foundation of the investments decision in a certain environment has more a theoretical nature, of understanding the essential tools of the analysis of investment projects. It is about using the actuarial computations in selecting investment projects or project portfolios that maximize the wealth of equity investors (shareholders and creditors) and thus maximize the enterprise

**Figure 2.** Use of capital at the level of economic agents

The risk manager must analyze all possible risks that can influence the profitability of the operating activity at the level of each phase. In this way, there can be identified and structured a series of risks as presented in table 3.


**Table 3.** Potential risks associated to the operating activity

percentage of sales.

**Figure 2.** Use of capital at the level of economic agents

structured a series of risks as presented in table 3.

The risk manager must analyze all possible risks that can influence the profitability of the operating activity at the level of each phase. In this way, there can be identified and

Running operating cycle determines both revenue and expenditure, activity level all affect profitability. Obviously, these are uncertain and do not remain unchanged from one period to another. The revenue is subject to combined influence of several factors: the volume of production conducted, quantity sold, market demand, sales price. The level of expenses acts on profitability both through the volume and the structure. Thus, a high level of fixed costs will pose a risk for a major operating company. It will be even greater as the sales volume will be lower, the fixed costs will be higher and the output will be made near the critical point (that level, on account of production or profit made are not recorded, no loss). The economic theory offers solutions for the determination of the point where the developed activity does not generate any profit or loss and the economic realities have shown a tendency of bringing forward the growth rate of expenses of the corresponding increase in production due to higher labor productivity, improving the organization of work or assimilation of technical progress. In addition, the increase in the level of production leads to a lower cost per production unit, the allocation base for fixed costs being higher. In this context, companies which registered a high level of fixed costs are much more exposed to risk than those who have a high share of variable expenses. For the operational risk assessment the operators can monitor the level of turnover compared to breakeven. From the surveys conducted it emerges the idea that a difference between them up to 10% reflects an unstable situation, between 10 and 20% - a relatively stable situation and over 20% a comfortable situation. Also, another indicator that allows sizing the operating risk is the operating leverage which reflects the percentage increase of the operating result due to the increase by one

One of the most important decisions at the micro-economical level is the allocation of capital for the course of the investment processes because they reflect the performance of current costs in order to achieve future revenue. So, the quantity of resources allocated for the investment achievement can determine their success and the business development. Real investments, embodied by essential assets for the development of the production and sale processes, are the subject of differentiated risks, the ability of managers in the selection of projects that ensure the maximization of the economic agent value being essential. To substantiate the investment decision, the practice imposed certain elements that allow the sizing of the efficiency of the analyzed project, namely: the amount of invested capital, life of purpose, net cash flows, residual value and the discount rate [8]

The criteria that can be applied to analyze the investment project must relate to an uncertain environment because a certain environment does not exist in reality. Building some models on the assumption that future cash flows are certain, it has an explanatory nature. In a deterministic economic and social environment is assumed the previous and certain knowledge of the interest rate and future monetary flows of the investment projects. Possible variations in interest rates and the risk of an improper activity, that of achieving breakeven (the dead point) and/or to become insolvent and to go bankrupt are not included in the calculation base for the investments efficiency. As a result, the foundation of the investments decision in a certain environment has more a theoretical nature, of understanding the essential tools of the analysis of investment projects. It is about using the actuarial computations in selecting investment projects or project portfolios that maximize the wealth of equity investors (shareholders and creditors) and thus maximize the enterprise

value. Concepts of interest rate as rate of productivity without risk (Rf) and net present value (NPV) are in the center of the analysis in the certain environment.

Risk Management in Business – The Foundation of Performance in Economic Organizations 239

be varied according to specific conditions both from the point of view of costs that have to be made and also from the point of view of performing gradually the investments during their execution; projects with a lower lifetime (to avoid negative effects of the obsolescence,

At the same time, however, it can be measured the risk by using some mathematical methods. The risk can be measured by using the dispersion or the intermediate square deviation of individual flows to the mathematical expectation. The smaller the dispersion is, the lower the investment risk is. This process involves a comparison between the sizes of the dimension of variation period of the rate of return for different investment projects. Practice also stated another procedure that allows accurate identification of optimal investment solution, referred to as the standard deviation [10], which reflects the small deviation of the distribution of probability of the return. For example, we consider two projects, X and Y, for which there are

and also for projects that allow faster recovery of the invested capital).

estimated the following rates of return and probability distributions (Table 4).

**Table 4.** The rates of return and the probability of occurrence for investment options


**Table 5.** Determination of risk based on the spread - type (standard approach)

RmX= 0,25x0,3 + 0,15x0,5 + 0,05x0,2 = 0,16

RmY= 0,30x0,3 + 0,20x0,5 - 0,10x0,2 = 0,17 - It is determined the amplitude of the variation of the rate of return with standard

For the risk assessment of the two projects we proceed as follows:

deviation (table 5).

The determination of cash flows generated by the investment project and of the moment of their action, the balance of the capital market and the practice of an unchanged interest rate for a long time that allows the exact identification of the borrowing costs are items that cannot be recorded on different market segments. In this context, the estimation of future positive and negative flows is a difficult operation which can be completed with an unreal perception and therefore a failure in the investment process. Estimation can be achieved by identifying some probability elements in the registration of certain levels of the used indicators even in an uncertain environment. The states of uncertainty can be generated by the investment project or the market. So, the manner in which is done the investment projection, project implementation and its use, and also the capital market fluctuations, the competitors' actions, the manifestation of possible financial and economic crisis can generate risks and differences between predictions and reality. For the embracement of an investment decision in the probabilistic environment are required the following steps: the sizing of the positive and negative flows in different probability assumptions, the measuring of the investment risk, the adoption of investment decision for a specific project [9].

To achieve the first stage it is necessary the sizing of the mathematical hope, respectively the expected annual average value of the cash flows and their comparison. The comparison can be done with the update of the cash flows or without this operation. The mathematical expectance of the cash flows of the investment projects is determined by the weighting of the annual flows (estimated in three ways: one positive or optimistic, one pessimistic and one medium) with their probability of implementation (this is determined either statistically or by consulting specialists with experience in the field or on the investor's intuition and the sum of the probabilities must be equal to the unity). When there are analyzed several projects, it is obvious that it will be chosen the one that generates the greatest mathematic hope of realizing the future returns. Comparing the projects allows better results if it is used the technique of flows update. The drawback of this criterion is that it does not take into account the variation of the results around the average. As a result, in financial practice, it can be used the criterion of dispersion of the total net discounted absolute cash flow. In this sense, it is considered the best project the one which determines a total discounted net cash flow that has the smallest dispersion.

The risk reflects the possibility of undesirable results. In the investment process, the risk is much higher than in other economic activities because the effects are recorded for long periods (resulting the difficulty of accurate predictions of the obtainable effects) and the negative flows have comfortable values that can materialize in losses (in case of failure ). For the avoidance of the risk, the investor may choose: the increase in the discount rate with a differential percentage according to the degree of risk associated with the type of investment (for example, the replacement investments are associated with a very little risk, the upgrading of the existing equipment in use involves a low risk, new investments have a higher risk while the strategic investments involve a substantial risk), but manifesting a degree of subjectivity in determining its size; the execution of an investment plan which can be varied according to specific conditions both from the point of view of costs that have to be made and also from the point of view of performing gradually the investments during their execution; projects with a lower lifetime (to avoid negative effects of the obsolescence, and also for projects that allow faster recovery of the invested capital).

At the same time, however, it can be measured the risk by using some mathematical methods. The risk can be measured by using the dispersion or the intermediate square deviation of individual flows to the mathematical expectation. The smaller the dispersion is, the lower the investment risk is. This process involves a comparison between the sizes of the dimension of variation period of the rate of return for different investment projects. Practice also stated another procedure that allows accurate identification of optimal investment solution, referred to as the standard deviation [10], which reflects the small deviation of the distribution of probability of the return. For example, we consider two projects, X and Y, for which there are estimated the following rates of return and probability distributions (Table 4).


**Table 4.** The rates of return and the probability of occurrence for investment options

For the risk assessment of the two projects we proceed as follows:

238 Risk Management – Current Issues and Challenges

flow that has the smallest dispersion.

value. Concepts of interest rate as rate of productivity without risk (Rf) and net present

The determination of cash flows generated by the investment project and of the moment of their action, the balance of the capital market and the practice of an unchanged interest rate for a long time that allows the exact identification of the borrowing costs are items that cannot be recorded on different market segments. In this context, the estimation of future positive and negative flows is a difficult operation which can be completed with an unreal perception and therefore a failure in the investment process. Estimation can be achieved by identifying some probability elements in the registration of certain levels of the used indicators even in an uncertain environment. The states of uncertainty can be generated by the investment project or the market. So, the manner in which is done the investment projection, project implementation and its use, and also the capital market fluctuations, the competitors' actions, the manifestation of possible financial and economic crisis can generate risks and differences between predictions and reality. For the embracement of an investment decision in the probabilistic environment are required the following steps: the sizing of the positive and negative flows in different probability assumptions, the measuring of the

value (NPV) are in the center of the analysis in the certain environment.

investment risk, the adoption of investment decision for a specific project [9].

To achieve the first stage it is necessary the sizing of the mathematical hope, respectively the expected annual average value of the cash flows and their comparison. The comparison can be done with the update of the cash flows or without this operation. The mathematical expectance of the cash flows of the investment projects is determined by the weighting of the annual flows (estimated in three ways: one positive or optimistic, one pessimistic and one medium) with their probability of implementation (this is determined either statistically or by consulting specialists with experience in the field or on the investor's intuition and the sum of the probabilities must be equal to the unity). When there are analyzed several projects, it is obvious that it will be chosen the one that generates the greatest mathematic hope of realizing the future returns. Comparing the projects allows better results if it is used the technique of flows update. The drawback of this criterion is that it does not take into account the variation of the results around the average. As a result, in financial practice, it can be used the criterion of dispersion of the total net discounted absolute cash flow. In this sense, it is considered the best project the one which determines a total discounted net cash

The risk reflects the possibility of undesirable results. In the investment process, the risk is much higher than in other economic activities because the effects are recorded for long periods (resulting the difficulty of accurate predictions of the obtainable effects) and the negative flows have comfortable values that can materialize in losses (in case of failure ). For the avoidance of the risk, the investor may choose: the increase in the discount rate with a differential percentage according to the degree of risk associated with the type of investment (for example, the replacement investments are associated with a very little risk, the upgrading of the existing equipment in use involves a low risk, new investments have a higher risk while the strategic investments involve a substantial risk), but manifesting a degree of subjectivity in determining its size; the execution of an investment plan which can - It is determined the weighted average of the return for the two projects:

RmX= 0,25x0,3 + 0,15x0,5 + 0,05x0,2 = 0,16

RmY= 0,30x0,3 + 0,20x0,5 - 0,10x0,2 = 0,17



**Table 5.** Determination of risk based on the spread - type (standard approach)

It is found that the lowest standard deviation is recorded in the project Y, the decision maker choosing for the realization of this project.

Risk Management in Business – The Foundation of Performance in Economic Organizations 241

result of the measures stated, we must provide other information. Thus, in 2009, 133.362 companies have temporarily suspended their activity, marking an increase of 1009,59% compared with 2008, 18766 have requested dissolution (increase of 398,83% compared with 2008) and 43616 were canceled from the Register of Commerce. Also, over 50% of Romanian companies with a total of more than 50 employees have opted for layoffs of staff, and from

An analysis of the existing data for highlighting the number of bankruptcies for the first 10

all these entities only 4.23% have recorded an economic growth.

**Table 6.** Evolution of bankruptcies recorded in Romania between 2006 – 2010

fields of activity reveals the most exposed sectors to this risk (table 7).

**Table 7.** Distribution of bankruptcies recorded by sectors of activity (first 10 positions)

in the mechanism of absorption of community funds, the examples could continue.

It is noted that the most exposed sectors are: wholesale, retail and construction, these retaining the "leadership" in almost all years of the period analyzed. In 2011 the shares held

The main factors that have caused major financial difficulties were: reduced possibilities of financing and aggravation of credit conditions, a significant reduction in consumption, with a direct impact on the demand of goods and services, the establish of new tax liabilities, products prices increases, particularly in the energy, fuel and raw materials level, the excessive bureaucracy, lack of an incentive package for the development of the business area, difficulties

Source: www. coface.ro

Source: www. coface.ro

by them are of 21%, 22% and 17% (Figure 3).

In the process of adopting an investment decision, the decision makers can use the breakeven analysis, the sensitivity analysis, the decision trees method, the simulation method.

Getting a higher rate of return is an objective aimed of any economic entity. Achieving this is often conditioned by the level of available resources. The insufficiency of own resources determines the use of borrowed resources, which increase indebtedness. If the economic profitability is higher than the financing costs for borrowed resources, the leverage effect is positive (otherwise the effect is negative). The manager must not omit, however, that a change in the financial structure may cause the increase of financial risk, without being possible an exact identification of the period in which insolvency may occur, especially because obtaining a rate of return greater than the cost of borrowed capital is not dependent only on the work done by the economic agent but also on the joint action of some external factors: competition, the evolution of energy prices, fuel, raw materials, the emergence of substitutes; the manifestation of some crisis with large amplitudes, the demand. Therefore, establishing a break-even point as a range rather than a fixed size seems a much more useful solution in avoiding financial risk [11].

The indebtedness and the insolvency (the insufficiency of available resources for the discharge of outstanding debt) are at the basis of the determination of insolvency and bankruptcy. These should be analyzed not only at the level of a financial exercise, because insolvency occurs when liabilities of previous period, to which we add the present and future ones, are higher than the existing availabilities and those that will be cashed in the future. To predict and avoid the bankruptcy risk it can be used a system of indicators represented by solvency ratios (these allow the sizing of the liquidity of a company), leverage, financial debt repayment capacity and the rate of financial autonomy. But, the expectation of a state of financial difficulty should not be synonymous with the liquidation of the firm. The manager can present to the creditors a plan for the recovery of the activity, and if they accept taking risks by granting new loans or rescheduling debts, the bankruptcy situation can be rectified.

In Romania, the insolvency law was adopted in the year 2006, when bankruptcy law was repealed. According to the legal provisions, an economic agent that is unable to pay his debts at maturity is obliged within 30 days from the date of recording this situation, to address the court showing that he wants to enter in the simplified procedure or reorganization one in accordance with a plan, with the to pay its debts. Not respecting the plan or the record of new losses determines the judicial administrator, the creditors committee or the special administrator to enter into bankruptcy.

From the data analysis presented in table number 6 there is a significant growth in 2006 and 2007, explained by the change of legal provisions in the field. The situation was set in 2008, but as a result of the global economic-financial crisis and fiscal measures taken by the legal authorities, the number of bankrupt companies increased considerably in 2009. For a complete vision of the situation recorded in the business environment from Romania as a result of the measures stated, we must provide other information. Thus, in 2009, 133.362 companies have temporarily suspended their activity, marking an increase of 1009,59% compared with 2008, 18766 have requested dissolution (increase of 398,83% compared with 2008) and 43616 were canceled from the Register of Commerce. Also, over 50% of Romanian companies with a total of more than 50 employees have opted for layoffs of staff, and from all these entities only 4.23% have recorded an economic growth.


Source: www. coface.ro

240 Risk Management – Current Issues and Challenges

solution in avoiding financial risk [11].

situation can be rectified.

maker choosing for the realization of this project.

It is found that the lowest standard deviation is recorded in the project Y, the decision

In the process of adopting an investment decision, the decision makers can use the breakeven

Getting a higher rate of return is an objective aimed of any economic entity. Achieving this is often conditioned by the level of available resources. The insufficiency of own resources determines the use of borrowed resources, which increase indebtedness. If the economic profitability is higher than the financing costs for borrowed resources, the leverage effect is positive (otherwise the effect is negative). The manager must not omit, however, that a change in the financial structure may cause the increase of financial risk, without being possible an exact identification of the period in which insolvency may occur, especially because obtaining a rate of return greater than the cost of borrowed capital is not dependent only on the work done by the economic agent but also on the joint action of some external factors: competition, the evolution of energy prices, fuel, raw materials, the emergence of substitutes; the manifestation of some crisis with large amplitudes, the demand. Therefore, establishing a break-even point as a range rather than a fixed size seems a much more useful

The indebtedness and the insolvency (the insufficiency of available resources for the discharge of outstanding debt) are at the basis of the determination of insolvency and bankruptcy. These should be analyzed not only at the level of a financial exercise, because insolvency occurs when liabilities of previous period, to which we add the present and future ones, are higher than the existing availabilities and those that will be cashed in the future. To predict and avoid the bankruptcy risk it can be used a system of indicators represented by solvency ratios (these allow the sizing of the liquidity of a company), leverage, financial debt repayment capacity and the rate of financial autonomy. But, the expectation of a state of financial difficulty should not be synonymous with the liquidation of the firm. The manager can present to the creditors a plan for the recovery of the activity, and if they accept taking risks by granting new loans or rescheduling debts, the bankruptcy

In Romania, the insolvency law was adopted in the year 2006, when bankruptcy law was repealed. According to the legal provisions, an economic agent that is unable to pay his debts at maturity is obliged within 30 days from the date of recording this situation, to address the court showing that he wants to enter in the simplified procedure or reorganization one in accordance with a plan, with the to pay its debts. Not respecting the plan or the record of new losses determines the judicial administrator, the creditors

From the data analysis presented in table number 6 there is a significant growth in 2006 and 2007, explained by the change of legal provisions in the field. The situation was set in 2008, but as a result of the global economic-financial crisis and fiscal measures taken by the legal authorities, the number of bankrupt companies increased considerably in 2009. For a complete vision of the situation recorded in the business environment from Romania as a

committee or the special administrator to enter into bankruptcy.

analysis, the sensitivity analysis, the decision trees method, the simulation method.

**Table 6.** Evolution of bankruptcies recorded in Romania between 2006 – 2010

An analysis of the existing data for highlighting the number of bankruptcies for the first 10 fields of activity reveals the most exposed sectors to this risk (table 7).


Source: www. coface.ro

**Table 7.** Distribution of bankruptcies recorded by sectors of activity (first 10 positions)

It is noted that the most exposed sectors are: wholesale, retail and construction, these retaining the "leadership" in almost all years of the period analyzed. In 2011 the shares held by them are of 21%, 22% and 17% (Figure 3).

The main factors that have caused major financial difficulties were: reduced possibilities of financing and aggravation of credit conditions, a significant reduction in consumption, with a direct impact on the demand of goods and services, the establish of new tax liabilities, products prices increases, particularly in the energy, fuel and raw materials level, the excessive bureaucracy, lack of an incentive package for the development of the business area, difficulties in the mechanism of absorption of community funds, the examples could continue.

But a real analysis involves not only determining the state of the financial balance and liquidity of a firm but it should aim to identify the margins of cash accumulation. To this purpose, there can be used the information provided by the profit and loss account statement which summarizes the outcome of economic and financial flows of entry, the combination of production and output factors over the period considered. Basically, this document creates a group of incomes and expenditures which have determined the overall result for the ended financial year and allows assessment of the overall economic and financial performances achieved by the firm by using some performance indicators. Known as intermediate management account balances these indicators are underlying preparation of financial statements analysis and forecasting, providing managers the possibility to identify deviations from the predictions made by categories of activity. Thus it can follow the degree of turnover achievement and the anticipated gross margin, carrying out the operating expenses in limits set, the impact on the indebtedness degree on current outcome, obtaining the estimated profit. Sizing the economic and financial performances is based on the diagnostic analysis, which aims to identity responses to a series of questions related to the results obtained, how they were obtained, the levels recorded compared with those projected, of the measures that can be adopted to achieve the objectives, both short and medium term and long term. The diagnosis-analysis is based on synthesis accounting documents (the situation of assets, liabilities and equity - balance sheet, financial results - income statement and attachments)

and other information on the evolution of prices and exchange rates [13].

decisions by managers in a rational manner.

economic performance level of the company.

and other indicators of profitability.

The sizing activity of the financial and economic performances should be carried out continuously and not only in difficult situations, as Jean- Pierre Thibaut stated "Performing some analysis is motivated not only whether the company has difficulties, but also when it wants to improve the results obtained". Practically, realizing continuously some analysis of the financial statements concerns the achievement of information necessary for taking

The analysis made must be supplemented by a series of liquidity indicators such as the overall liquidity, immediate liquidity, ability to pay rates, coverage degree of daily expenditure, the rotation period of assets, debt indicators, namely: indebtedness, the degree interest coverage, total debt ratio, leverage, general solvency ratio, management indicators (duration of stock rotation, customer flow, credit suppliers, non fixed, fixed and total assets)

Whatever the type of indicators used, the decision maker must consider a number of issues related to the need to supplement the fixed analysi**s** with dynamic analysis (permanently there occur changes which can affect the results recorded at a moment in time) but also the use of a complex system of indicators (making analysis based on a single indicator may lead to misinterpretation) which are able to show clearly and accurately the financial and

The activity done by any economic entity can be structured at the level of three fundamental components: operating, financial and extraordinary (Figure 4). The manager must identify

the potential risks for each component so that it can base an effective strategy.

**Figure 3.** Structure of bankruptcies on sectors of activity in 2011
