Starting from the need to optimize the financial structure of the enterprise, the article aims to review a few concepts related to financial structure and bankruptcy risk, the presentation of the bankruptcy risk analysis based on assets balance sheet, liquidity ratios and last, but not least, scoring method. It also presents some points of view regarding the current economic crisis and the evolution of national and international level approaches about bankruptcy and the risk of bankruptcy.financial structure, bankruptcy risk, liquidity ratios

Cornelia NITU

English

Research Papers in Economics

266                                                                       Finance – Challenges of the Future   
OPTIMAL FINANCIAL STRUCTURE, BANKRUPTCY 
RISK AND THE RIGHT TO A NEW BEGINNING 
 
Cornelia NIŢU, PhD Student 
University of Craiova 
1. Contents of the financial structure 
and notions about the bankruptcy risk  
 
  The fundamental objective of any 
economic entity is to obtain profits in the 
conditions of maximization of enterprise 
value and minimize the risks associated 
with the business. Optimizing the 
financial structure of the enterprise is a 
perfect correlation between personal 
capital and borrowed one, defined in 
terms of yield and risk so that the value 
of the enterprise is at a maximum. 
  Many are the theoretical 
attempts of determining the optimum 
financial structure, but the work itself 
shows that an optimal financial structure 
or an ideal one is impossible to establish.  
  Optimal financial structure has 
evolved as a concept, over time. If in the 
50s specialists in economic theory 
believed that the optimal financial 
structure requires as low a debt as 
possible, between the 60s-70s a "good" 
financial structure also had to take into 
account the debt up to the level of 
personal capital. Starting with the 80s a 
good financial structure should lead to a 
progressive decrease of the degree of 
indebtedness, improvement of self-
financing and financial profitability.  
  The large risks involved in 
increased indebtedness as a method of 
financing, in the sense of the risk that the 
enterprise can no longer meet the 
payment obligations, can attract the 
company’s insolvency. 
  Business activity is always 
subject to risk, but risk should not be 
seen as something bad, it must be known 
and managed.  
  The main risks are related to the 
loss of the amount invested and, 
implicitly, the loss of the business. Any 
business involves the materialization of 
investor expectations, manager’s 
expectations, which can become true or 
not.  
  The degree of risk becomes 
even more powerful in the current 
economic crisis, when it is impossible to 
determine and anticipate changes in the 
environment. In similar circumstances 
managers take different decisions, some 
companies have profits, others bear 
losses. There are views according to 
which there are no profitable and 
unprofitable businesses, instead 
businesses are well managed or poorly 
led. The failure or the success of their 
business ultimately depends on the 
ability of the management to take 
effective decisions in optimal terms, and 
risk is an important factor in the decision-
making process.  
  Risk can induce extraordinary 
opportunities for those who know how to 
manage it. The answer is not complete 
avoidance of the risks, risk avoidance, 
but avoiding the little understood risks.  
  However, with the development 
of the ideological economic ensemble, 
there was a significant increase in terms 
of determination, calculation and 
handling of risk.  
  In recent years, in global 
practice, the concept of risk management 
has become highly developed and enjoys 
a tremendous attention.  
  Gains have worked as a 
barometer of performance in the past, 
with little attention granted to the risks 
assumed for those earnings. The general 
trend is that sophisticated investors have 
focused more on the quality gain, better 
assessing the relationship between risk 
and gain.  Year VIII, No.9/2009                                                                                                   267 
 
  Depending on the way in which 
risk is formed, it is:  
  - economical risk, representing 
the inability to adapt in time and at less 
cost to the variations of the environment.  
  -financial risk, it is related to the 
degree of indebtedness of the 
economical agent. 
  -risk of bankruptcy (of 
insolvency), representing the inability of 
any businesses, banks to face the 
obligations come to maturity.  
  In the system of financial-
economic analysis, the analysis of the 
enterprise’s capacity to be solvent and to 
overcome the risk of bankruptcy occupies 
a central place.  
  Any disorder of the payment 
obligations generates prejudices and 
requires urgent intervention. Financial 
balance is absolutely imperative, that can 
not be missed under any motivation.  
  In economic practice, we can 
conceive that a business going through 
more difficult times temporarily gives up 
some objectives for growth, economic or 
social ones, but it can not renounce the 
goal of ensuring solvency, which is the 
financial condition of survival.  
  The company’s ability to meet 
with the obligations on time is assessed 
differently, according to the concrete 
economic and financial conditions of 
activity.  
  An enterprise may have 
occasional or temporary difficulties 
caused, for example, by the non-
payment, on time, of an important debt or 
by the accelerated payments in a period 
of rapid increase in activity.  
  In this case, payment difficulties 
arise as an expression of temporary 
differences, which do not affect the 
image of the enterprise. 
  Simple solutions can allow to 
overcome these difficulties and to 
reinstall the continuity of payments: 
obtaining additional terms from the 
suppliers, delaying financial debt, 
obtaining short term loans.  
  The enterprise may meet 
periodic financial difficulties, for example 
late payments at certain times of the year 
or periods of accelerated growth.  
  Even if the viability of the 
business is not put in danger, its image 
can degrade due to periodic 
disturbances.  
  Permanent difficulty of sustaining 
the payment of obligations is an 
expression of economic and financial 
structural fragility.  
  They can generate restriction of 
activity, reduce the number of 
employees, restructuring of management 
or in very serious cases, the bankruptcy.  
  Ignoring risk or treating them 
superficially can lead to some major 
financial difficulties or even bankruptcy of 
the firm.  
  It is necessary therefore to call to 
the appropriate instruments for the 
prediction of the risk of bankruptcy, to 
provide the decision-maker with the 
possibility of identifying in advance the 
symptoms of financial difficulties, 
reflected, usually in the degradation of 
the financial situation and the level of 
financial rates.  
  The study of firms in difficulty is 
particularly important today in our 
country, being of interest to banks, which 
are concerned with the quality of loan 
portfolios held by them, and for different 
categories of shareholders, investors, 
creditors and business partners.  
  The main problem arisen by the 
practice is to choose the moment to 
begin the liquidation procedure, which 
should not be neither anticipated nor 
delayed too long. If the moment will be 
set too early, the enterprise will not be 
able to search for easier recovery 
solutions and will suffer irreparable loss 
of image.  
  Economic theory provides us 
with a number of means by which 
professionals propose methods for 
determining the risk of bankruptcy.   
  These include: risk analysis of 
bankruptcy based on patrimonial 
balance, risk analysis of bankruptcy rates 
based on solvency, bankruptcy risk 
analysis based on scoring method.  268                                                                       Finance – Challenges of the Future   
 
2. The right to a new beginning 
 
  Global economic crisis and the 
financial disaster that struck companies 
in the world have made financial analysts 
to be more careful when giving 
information or making estimates about 
the financial statements. They now avoid 
using too hard terms in their lectures, 
which may lead to the collapse of society 
in a time when tensions on financial 
markets are enormous.  
  For most investors the financial 
crisis we have been crossing in the last 
months was also an opportunity to learn 
more about how an economy works.  
  However for specialists, in this 
period, it offered a real lesson in 
semantics.  
  Each day comes with new 
happenings which show that most 
financial services companies are 
particularly vulnerable to decreasing 
levels of confidence among creditors, 
business partners, investors and 
customers.  
  For this reason, the rumors, fears 
and speculation released in the press 
can seriously affect a company in a very 
short time.  
  Consequently reporters and 
editors, so often accused of exaggeration 
and of alarming the financial system 
when it is not necessary, are in the 
position of choosing their words very 
carefully.  
  In most articles we see such 
actions called "slide down", and markets 
go "down", in any case we no longer use 
words like "crash". Companies are 
"shaking" or "are in difficulty", rather than 
towards collapse or bankruptcy. We are 
trying to avoid as much as possible the 
use of words like "crash" or "free fall", 
said Ali Velshi, a business correspondent 
at CNN, adding that "if someone wants to 
say that markets are in free fall, we prefer 
to discuss this first”, and the result will 
most likely be a change in the words.  
  Specialists say that there is a 
significant difference between their duty 
to make public what is happening in 
markets and banking institutions and the 
rumors which are causing panic. In fact, 
"panic" is the word that occupies the first 
position among the terms which the news 
agencies have avoided to use, since it 
can lead to a so-called self-fulfillment of 
bleak prophecies.   "Crash",  "panic", 
"hell", "apocalypse" are just some of the 
terms we are trying to avoid.   
  At the same time, none of the 
specialists want to be accused of making 
the dangers seem insignificant.  
  On the first page of financial 
publications, the financial crisis appears 
to be the most serious since the Great 
Depression, and newspapers prefer to 
show every day titles that occupy the full 
width of the page, after not having 
resorted to this method of promotion for 
some time.  
  If car manufacturers and real 
estate developers would face problems, 
for example, the main question for those 
working in the media would be: "Who’s 
next?”. 
  But now journalists have become 
very cautious in launching predictions 
regarding the possible bankruptcy of 
some financial institutions - in fact, 
several articles written during the autumn 
of 2008 and which predicted the collapse 
of certain banks have avoided saying 
which one was more exposed to this risk.  
  Sometimes you can not avoid 
stating the names, as in the case of 
rumors related to the development of 
“KRAFT FOOD”, which occurred several 
months before the financial institution 
declared itself bankrupt, but even then 
journalists tried to not make predictions. 
In the middle of summer 2008, an article 
in the FINANCIARUL described “KRAFT 
FOOD” as "in distress" and "unsafe", but 
does not explicitly mention the possibility 
of collapse or bankruptcy. No further than 
November 2008 the company "closed the 
chocolate factory in Brasov."  
  We can not avoid describing in 
real terms the situation and the fact that it 
was really in trouble”, "said 
Realitatea.net, adding that "but we will 
not say that there are three or five 
institutions that may fall next week."  Year VIII, No.9/2009                                                                                                   269 
 
  It is one thing to say that an 
industrial company is having problems in 
paying the debts, and is something else 
to say this about a financial institution.” 
  The situation has not changed at 
present, but in the last few weeks, 
reporters from ANTENA 1 began to 
emphasize the fact that part of what they 
said was other people’s opinion, and that 
the source which issued the piece of 
information could later motivate the 
reasons for the statements and if the is 
not consistent or may prove wrong.  
  On the other hand, almost half of 
the employees in Romania can not sleep 
because of the stress at work, shows a 
study conducted by “Sinectik”, 
specialized in market studies, opinion 
polls, sociological studies, a global 
provider of e-learning . According to the 
analysis, at the beginning of a year which 
is announced to be difficult, 92% of 
Romanian employees are stressed at 
work, while 31% fear that in 2009 they 
will be overworked.  
  Also, because of stress, almost 
one third of employees in Romania have 
become very emotional, while 15% 
began to drink in order to cope with the 
pressure.  
  There is a feeling of insecurity 
regarding job stability, and people are 
nervous because they do not think they 
have the qualities needed in order to 
maintain their jobs. The study also 
reveals that almost one quarter of 
employees feel that they lose control 
over the day, one third feel frustrated by 
the atmosphere at work, while 15% think 
that they didn’t have enough hours of 
training to enable them to do their job as 
they would wish.  
  The study was conducted in late 
November 2008, on a sample of 3,000 
respondents from 14 business sectors.  
  Recession in Romania is more 
severe than anticipated by the 
government, which admitted being wrong 
when estimating that the local economy 
will recover by the second half of this 
year.  
  I believe that now must wait until 
the end of this year or early 2010 to see 
a return on growth of the economy.  
  The Government estimates for 
this year a decrease of 3% of the 
economy, a forecast that might be 
announced by the authorities with the 
presentation of the budget. The new 
projection shows the most pronounced 
economic decline after the Second World 
War.  
  Romania's economy will face, 
over the next year, a record level for the 
past three decades, while housing prices 
are reduced at their fastest pace after 
2002, according to “Sinectik”.  
  The rapidity and global nature of 
the crisis suggests that it is almost 
impossible to make certain previsions for 
the future.  
  What is clear now is that the 
short and shallow recession we expected 
a few months ago could be deeper and 
longer.  
  The Governor of Bank of 
Romania, Mugur Isărescu, declared that 
Romania is probably in the midst of a 
recession, just one week after the central 
bank’s strategy diminished the interest of 
monetary policy by 1.5 percentage 
points.  
  The Romanian Leu depreciated 
strongly, reaching the lowest level of 
trading in relation to the euro, as 
investors had relied on the fact that the 
deterioration of the Romanian economy 
would intensify.  
  Global financial crisis has led 
banks to reduce the number of loan 
contracts in order to preserve capital.  
  Approvals for mortgages have 
reached the minimum level in January 
2009 and the prices of houses have 
decreased by 15% in February, 
announced the National Bank of 
Romania.  
  Sinectik anticipates that 
Romania will suffer a difficult economic 
downturn, but believes it should avoid a 
major collapse, due to relatively low debt 
of the private sector and reduced 270                                                                       Finance – Challenges of the Future   
dependence on external trade, states 
Mediafax. 
  There is ample evidence that the 
economy is at present at a slow rate, and 
it is happing rapidly.  
  The export-oriented sectors are 
reducing production and the construction 
industry is going worst.  Liquidity on the 
local market has improved somewhat 
compared to the month of February, but 
the National Bank of Romania still 
maintains high interest levels, in order to 
support the currency. In such a situation 
a second chance after the bankruptcy 
is an option which must be exercised by 
investors.  
  For example, the European 
Commission wants to encourage those 
who go bankrupt to try again. EC is 
measuring the costs of prejudices that 
are attracted bb bankruptcy and is 
analyzing four groups of barriers for the 
creation of a new business after 
bankruptcy.  
  The premise for the 
Commission’s Communicate is that 
bankruptcy is not necessarily a symptom 
of fraud, and the past mistakes tend to 
make the entrepreneurs wiser.  
 The  European  Commission 
proposes four major approaches for 
removing the stigma attached to 
bankruptcy:  
 changing mentalities: improving public 
image through education and media; 
 the role of insolvency law; 
 active support of companies who are 
risking bankruptcy; 
 active support of those who want to 
reopen their company.  
  EC shows that although only one 
of 20 bankruptcies involves fraud, the 
European public tends to believe that 
those going bankrupt are corrupt. But 
bankruptcy is a natural phenomenon of 
the market economy.  
  Germany presents an example of 
good practice in encouraging the 
principle of the second chance for 
establishing a business. German Agency 
for enterprises set up, two years ago, a 
START prize for the creation of new 
companies, which has a RESTART 
division, for those who set up a company 
after they went through a bankruptcy.  
  The Commission’s view on 
insolvency law is that in many EU 
Member States bankruptcy law treats all 
bankruptcies in the same way, whether 
they are accompanied by fraud or not. 
There are also many restrictions for 
people who go bankrupt, and the 
procedures for the reestablishment of a 
company are more cumbersome.  
  The Commission shows that it is 
vital to create a legislative framework 
which, while protecting the interests of all 
parties involved, should recognize the 
right of a contractor to slip and start 
again. This means that bankruptcy laws 
should include a clear distinction 
between the treatment of fraudulent 
bankruptcies and of the others.  
  For example, entrepreneurs who 
have not made any kind of fraud in 
bankruptcy may receive in court a 
declaration of non-fraudulent bankruptcy.  
  For example, in Great Britain, all 
those who go bankrupt are subject to 
restrictions during the legal proceedings 
for bankruptcy, but after this period the 
restrictions are removed for those who 
have not committed fraud.  
 The  European  Commission 
provides solutions and support for those 
who want to reestablish the company by 
providing financial support, ensuring the 
possibility of those non-fraudulent 
bankrupt companies to contract loans, or 
by ensuring equal access of these people 
to public auctions.  
 
3. Conclusions 
 
  Although finding the optimum 
financial structure of the enterprise is a 
difficult goal to reach for most 
businesses, financial management is 
required to regularly and frequently 
monitor the financial situation of the 
company in situations of economic crisis, 
to determine the most appropriate 
methods for predicting bankruptcy, and if 
this undesirable phenomenon should Year VIII, No.9/2009                                                                                                   271 
 
occur, to be ready for a new beginning, a 
new approach of the business. 
 
 
   
   
Băileşteanu Gh. 
Diagnosis, Risk and Efficiency in Business, Mirton Publishing House, 
Timişoara, 2008; 
Bătrâncea M., 
Bătrâncea L. M. 
Financial Analysis of the Company, Risoprint Publishing House, Cluj 
Napoca, 2007; 
Opriţescu Marin  Management of Risks and Bank Performance, Universitaria 
Publishing House, 2006; 
Sichigea N.  Financial Management of the Company, Universitaria Publishing 
House, Craiova, 2003; 
Siminică Marian  Model of Analysis of the Bankruptcy Risk at Romanian Industrial 
Companies. 
Vâlceanu Gh., Robu 
V, Georgescu N. 
Economic and Financial Analysis, Economica Publishing House, 
Bucharest, 2004; 
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Optimal financial structure, bankruptcy risk and the right to a new beginning

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