Which is the Better Financial Risk Early Warning Mechanism, Traditional or Cashflow?

Abstract

Purpose - Because traditional financial risk early warnings are often based on information of accounting profit that can be manipulated, they can cause information distortion, especially in small and medium-sized enterprises(SMEs). Therefore, this study aims to compare the existing early warning method with the early warning mechanism of financial risk from the perspective of cash flow and to determine which method is better. Design/Methodology/Approach - The study uses Taizhou Tongjia Hardware Company as an example, and uses the case study and financial analysis methods to compare the company’s financial situation from both the traditional financial and the cash flow perspectives. Findings - We find the traditional financial statement data show that the earnings over the past five years have been rising, however, the company’s capital structure is seriously imbalanced and the enterprise is facing serious financial risks. Therefore, the results were derived that the company needs to establish an early financial risk warning mechanism from the perspective of cash flows. Research Implications - This study can help companies improve their early warning mechanisms and properly evaluate and address financial risks.