As a business owner, are you aware of your company’s financial health? This is important information to be confident in because it can impact nearly every decision you make. If you are confident that you are in good standing financially, you must be relying on certain information to get you to that point. For many business owners, it is their company’s z-score that has given them that confidence. When it comes to business, you can’t always trust your gut. You need to have cold, hard facts that can help you understand where your company stands. Principle Insolvency is here to talk about z-scores and how they can be helpful for business owners.
What a Z-Score Is
It is important to first understand what a z-score is. The z-score was a system that was developed by Edward I. Altman in 1968. It is a quick way to estimate the likelihood of financial distress for your company. This is a health tool to distinguish between healthy businesses and those that are likely to struggle. When he was developing this system, he used data from 66 publicly held companies. 33 of them had filed for insolvency. He looked closely at financial ratios and to create an intricate formula that was able to arrive at a score for the company. In regard to z-scores, if you have a score that is lower than 3, your company is likely to experience hardship. If your number is below 1.80, you are more than likely already in financial distress.
A Z-Score Provides a Picture into Financial Stability
In the beginning, the system that was set up by Altman wasn’t perfect. In fact, it only has a 72% accuracy rate. It has been fine tuned over the years, and the accuracy rate now sits at 80-90% accuracy when determining the financial stability of a company. If there is a chance that your business could be in trouble, it is important to get your hands on your company’s z-score to give you a clearer picture of what you’re up against. You can do this by gathering some important financial information that is important in calculating your z-score.
– Total assets
– Retained earnings
– Current and long-time liabilities
– Earnings before interest and taxes
– Net worth or total assets minus liabilities
– Market value
– Sales
How to Use Your Company’s Z-Score
When you know what your company’s z-score is, you are able to make decisions with confidence. You don’t want to have the misconception that you’re in a great position when in reality, you are struggling. Having the z-score can be and incredibly helpful tool.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
If you are worried that you are in a negative financial position, you can turn to the professionals at Principle Insolvency to help you navigate the next moves you need to make. We can help you understand what it means to be insolvent and what options you have available to you. Call us today!