**5. The system of indicators that allow the highlight of the economicfinancial performances of the economic entities and the substantiation risk management decisions**

Maximizing the efficiency of the activities performed at the firm level requires a constant monitoring of the financial performances. In other words, to optimize economic performances is necessary to implement a financial diagnostic system of the performed activity, resulting in a series of' documents that include a set of indicators requested by the management team. It is obvious the fact that the efficiency of the system is determined by the type of documents requested, by the way in which cooperation takes place between different components of the company but also by the technology used in the development of the reports.

To estimate the financial status of a firm there can be used use a series of indicators that allow highlighting the profitability, solvency, liquidity, turnover of debts and the degree of financial independence. The activity of financial diagnosis of a firm can be made to determine the situations of financial disequilibrium and of the generating causes, so that there can be adopted in time the necessary measures for effective management. In this case, are involved the managers, shareholders and the employees. However, the diagnosis may cover the company's ability to make profit, to record surplus flows in comparison to the negative ones due to the activity performed, to honor payment obligations, cases in which it is performed by persons outside the firm (banks, potential investors, customers, competitors, state). But, even if it concerns an internal or external analysis of the activity undertaken, the objectives followed are the assessment of economic and financial performance and identification of the potential risks that may occur.

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.

242 Risk Management – Current Issues and Challenges

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

**risk management decisions** 

the reports.

**5. The system of indicators that allow the highlight of the economicfinancial performances of the economic entities and the substantiation** 

Maximizing the efficiency of the activities performed at the firm level requires a constant monitoring of the financial performances. In other words, to optimize economic performances is necessary to implement a financial diagnostic system of the performed activity, resulting in a series of' documents that include a set of indicators requested by the management team. It is obvious the fact that the efficiency of the system is determined by the type of documents requested, by the way in which cooperation takes place between different components of the company but also by the technology used in the development of

To estimate the financial status of a firm there can be used use a series of indicators that allow highlighting the profitability, solvency, liquidity, turnover of debts and the degree of financial independence. The activity of financial diagnosis of a firm can be made to determine the situations of financial disequilibrium and of the generating causes, so that there can be adopted in time the necessary measures for effective management. In this case, are involved the managers, shareholders and the employees. However, the diagnosis may cover the company's ability to make profit, to record surplus flows in comparison to the negative ones due to the activity performed, to honor payment obligations, cases in which it is performed by persons outside the firm (banks, potential investors, customers, competitors, state). But, even if it concerns an internal or external analysis of the activity undertaken, the objectives followed are the assessment of economic and financial

performance and identification of the potential risks that may occur.

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].

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 decisions by managers in a rational manner.

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) and other indicators of profitability.

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 economic performance level of the company.

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 5.** The formation of the result of activity performed broken down by components


result. Thus, an increase in costs can be determined by:


from total incomes and the index from operating activity.

The risk of reducing them may be caused by:


at the level of competitors;

revenues.


(Table 8).



The operating result is decisively influenced by the level of income and expenditure obtained. As a result, the manager must seek firstly the dynamics and the structure of sales.




At the same time, it is necessary to identify the impact of the costs upon the operating

But, a great importance is had not only by the determination of the indicator stated and by the analysis of its components, but also by the investigation process from the dynamic point of view because it can provide additional information on level of performance correlated with potential generating causes. In this respect, it is necessary to calculate the indexes that diminish the evolution of operating incomes and operating expenses and their comparison

We consider that the income index is calculated as ratio between the income from current period and the income obtained in the previous period. We use for comparison the index

**Figure 4.** Structure of developed activities and risks afferent

Obviously, is not enough an overview of these risks, without a detailed analysis of the causes. For example, the risk, "cutoffs in the supply "can occur from multiple causes. Thus, the supplier fails to comply with the contract clauses regarding the delivery terms or quantities established , may occur accidents during transport, the quality of goods supplied is not according to the requirements established, which leads to their refusal by the buyer, there take place extraordinary events ( fires, floods, earthquakes), etc. Also, these cutoffs may have a short, high or very high length, with direct implications on the production process, or, as appropriate, in marketing (minor, significant or major). The analysis of these issues should be completed with the assessment of the losses caused by the manifestation of the mentioned risk. Another example can be the one of the risk of increasing taxes and fees. The causes in this case are external, but applying the principles of fiscal management can only have a favorable impact on the financial performances of the company.

Risk management should be based on an analysis of indicators highlighting economic financial performance at the level of the activities shown in figure number 5. But it requires a detailed breakdown of the indicators presented in order to identify the contribution of each component in recording a result or another, being not enough to follow-up the synthetic level. In addition, if not takes into account also their dynamics and not is not corroborated with factors of influence and circumstantial situations, it is not possible to determine the causes that generate negative effects and no anticipation of any difficult times.

The main components that are at the base of the formation of the gross result, are presented in Figure 5.

**Figure 5.** The formation of the result of activity performed broken down by components

The operating result is decisively influenced by the level of income and expenditure obtained. As a result, the manager must seek firstly the dynamics and the structure of sales. The risk of reducing them may be caused by:


244 Risk Management – Current Issues and Challenges

**Figure 4.** Structure of developed activities and risks afferent

times.

in Figure 5.

Obviously, is not enough an overview of these risks, without a detailed analysis of the causes. For example, the risk, "cutoffs in the supply "can occur from multiple causes. Thus, the supplier fails to comply with the contract clauses regarding the delivery terms or quantities established , may occur accidents during transport, the quality of goods supplied is not according to the requirements established, which leads to their refusal by the buyer, there take place extraordinary events ( fires, floods, earthquakes), etc. Also, these cutoffs may have a short, high or very high length, with direct implications on the production process, or, as appropriate, in marketing (minor, significant or major). The analysis of these issues should be completed with the assessment of the losses caused by the manifestation of the mentioned risk. Another example can be the one of the risk of increasing taxes and fees. The causes in this case are external, but applying the principles of fiscal management can

Risk management should be based on an analysis of indicators highlighting economic financial performance at the level of the activities shown in figure number 5. But it requires a detailed breakdown of the indicators presented in order to identify the contribution of each component in recording a result or another, being not enough to follow-up the synthetic level. In addition, if not takes into account also their dynamics and not is not corroborated with factors of influence and circumstantial situations, it is not possible to determine the causes that generate negative effects and no anticipation of any difficult

The main components that are at the base of the formation of the gross result, are presented

only have a favorable impact on the financial performances of the company.


 At the same time, it is necessary to identify the impact of the costs upon the operating result. Thus, an increase in costs can be determined by:


But, a great importance is had not only by the determination of the indicator stated and by the analysis of its components, but also by the investigation process from the dynamic point of view because it can provide additional information on level of performance correlated with potential generating causes. In this respect, it is necessary to calculate the indexes that diminish the evolution of operating incomes and operating expenses and their comparison (Table 8).

We consider that the income index is calculated as ratio between the income from current period and the income obtained in the previous period. We use for comparison the index from total incomes and the index from operating activity.


Analysis can be extended to the other components. Thus, if the index exceeds the financial

**Table 9.** Effects and causes of the evolution of financial and extraordinary revenues and expenses

investment securities at a lower value than the book, etc.

practice are presented in table 10.

of being in risk management:

situation;

Causes may include the prevalence compared with their borrowed resources; increase the interest rate on loans, recording a difference of an adverse exchange rate, yielding

If the operating result and the financial one are positive, there is a state of, "financial health" in the company, which, combined with a shorter duration of the credit customer compared with the credit provider (the collection of receivables is achieved at a shorter interval than the payment of liabilities), determines a state performance. Situations that can occur in

In this connection, we draw from the research conducted a series of ideas to be considered



financial year), without taking into account the dynamic changes recorded;

cost of financial income, there is an inefficiency of the funding policy (table 9).

**Table 8.** Effects and causes of the evolution of revenues and operating expenses

Analysis can be extended to the other components. Thus, if the index exceeds the financial cost of financial income, there is an inefficiency of the funding policy (table 9).

246 Risk Management – Current Issues and Challenges

**Table 8.** Effects and causes of the evolution of revenues and operating expenses


**Table 9.** Effects and causes of the evolution of financial and extraordinary revenues and expenses

Causes may include the prevalence compared with their borrowed resources; increase the interest rate on loans, recording a difference of an adverse exchange rate, yielding investment securities at a lower value than the book, etc.

If the operating result and the financial one are positive, there is a state of, "financial health" in the company, which, combined with a shorter duration of the credit customer compared with the credit provider (the collection of receivables is achieved at a shorter interval than the payment of liabilities), determines a state performance. Situations that can occur in practice are presented in table 10.

In this connection, we draw from the research conducted a series of ideas to be considered of being in risk management:



Risk Management in Business – The Foundation of Performance in Economic Organizations 249

of the best combination of rates that allow the differentiation of the companies analyzed. Basically, the indicator resulting (statistical discriminant model) reflect the overall situation of the company with manifest and predictability. One of the first score functions used in the analysis of default risk was developed by Altman in 1968, which allows the registration of a degree of predictability of 75% of bankruptcies two years prior to their production [15] . The model was further developed to be applied in all branches. Altman model is frequently used in financial practice and enable a correct the result in the

It should be mentioned also other important models: the Conan – Holder model [17], the model of the Central Balances of the France Bank or the method of the French Commercial Credit. In the Romanian school, the possibility to determine this pattern was limited because the transition from the centralized economy to the market economy was quite large and the information required was not available or relevant. However, the significant concerns embodied in the formulation of the scoring models have many authors [18 -20, 14]. The application of scoring functions in the Romanian economy cannot yet be considered as a safe situation of risk management. We believe that the models that have demonstrated the applicability of the developed economies do not correspond to an economy characterized by high instability. In addition, the proper identification of the bankrupt companies, the long absence of the legislative provisions governing the bankruptcy, the lack of analysis of a wider range of firms before bankruptcy, focusing on financial variables without including non-financial indicators and trying to develop the models available in all branches reflect some of the aspects that require the completion of the risk management techniques based on a discriminant

The manifestation of risks in a higher or lower degree cannot be eliminated, regardless of the strategy used. However, in practice it has been shown that a potential risk with higher negative impact but which has been identified and controlled can cause fewer losses than a lower but uncontrolled risk. Therefore, a good manager should use a risk management strategy in order to enable the reduction or even avoidance of losses caused by their manifestation. A proactive risk management can generate durable benefits for the company, materialized wither in costs reduction or in improving or making internal processes efficient, or in canceling insurances expenses, which are not justified from economic point of

The problems presented in this work are due to identify the issues that highlight the importance of active risk management, to optimize the ratio of the risk level –the level of the profitability achieved, the need to monitor and update the information on risk and the possibility of realization, the role of risk management in identifying the opportunities of the business determines the highest level of profitability in accordance with the accepted risk

classification of 70% [16].

analysis with other possibilities.

**7. Conclusions** 

view.


**Table 10.** Situations determined by the evolution of the components of the current result of the year
