Author(s)

Lv You ¹

Affiliation(s)

¹ Northeastern University, Shenyang, Liaoning, China

Corresponding Author

Lv You

ABSTRACT

The establishment of a financial early warning system (FEWS) in non-financial corporations is critical to mitigating risks arising from internal factors such as poor management, excessive debt, and resource misallocation. Drawing on Ulrich Beck's risk society theory, this study emphasizes the alignment of risk and return to prevent systemic crises, particularly in industries like China's real estate sector, where capital chain fragility highlights the urgency of robust risk control. The proposed FEWS integrates financial statements, business plans, and analytical tools such as cash flow analysis, financial ratios, and Edward Altman's Z-score model. Key indicators include cash flow sufficiency, debt repayment capacity (e.g., interest coverage ratio, asset-liability ratio), profitability (ROE), and operational efficiency metrics. The Z-score model, incorporating liquidity, profitability, and leverage indicators, quantifies bankruptcy risk and categorizes firms into stable, grey, or high-risk zones. Budget management is underscored for its role in resource allocation, risk identification, and process control, ensuring liquidity and operational stability. Principles such as integration, timeliness, comprehensiveness, and risk-return balance guide system implementation, emphasizing governance structures, stress testing, and risk-oriented strategies. By embedding risk management into strategic decision-making and operational workflows, corporations can enhance value creation while safeguarding against financial instability. This framework provides actionable insights for enterprises to navigate uncertainties and sustain long-term growth in volatile economic environments.

KEYWORDS

Financial Early Warning System, Non-financial Corporate, Z-score Model

CITE THIS PAPER

Lv You, Discussion on the Establishment of Financial Early Warning System in Non-financial Corporate. Financial Engineering and Risk Management (2025) Vol. 8: 125-132. DOI: http://dx.doi.org/10.23977/ferm.2025.080117.

REFERENCES

[1] Ulrich Beck. Risk Society(1992), SAGE Publications Ltd.
[2] Zheng Wei. "Construction of corporate Financial early warning Index System", Finance and Accounting Communication (Finance), 2006(3):35.
[3] Zou Huiping, Xu Hanfeng, Huang Wenjun, Xu Da. Establishing Financial early warning Mechanism to Guard against corporate, Financial Risk Hubei Vocational and Technical College, 2007,10(4):61-63,60.
[4] Management Accounting Application Guidelines No. 700 – Risk Management (2018).
[5] Guidance on Comprehensive Risk Management for Financial Institutions in the Banking Sector (2016) 44.
[6] Li Yao. Introduction to Corporate Mergers and Acquisitions and Reorganization (3rd edition) Shanghai University of Finance and Economics Press.
[7] The Chinese Institute of Certified Public Accountants (CICPA) & China Financial & Economic Publishing House. Corporate Strategy and Risk Management(2024), China Financial & Economic Publishing House.
[8] Altman, Edward I., Edith Hotchkiss, and Wei Wang. Corporate Financial Distress, Restructuring, and Bankruptcy: Analyze Leveraged Finance, Distressed Debt, and Bankruptcy[M]. Wiley, 2019.

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