Eliminating the Effects of the Companies Insolvency Risk:A Model Approach

Managers around the world identify risk of liquidity problems as the primary barrier of their decisions. In the global economy, in the turbulent environment, the effects of companies' insolvency risk lead to many operational and strategic problems also causes of contagion effect. Therefore, it is important to study the phenomenon of insolvency, determinants that shape it as well as seek opportunities to reduce the risk of this problem. The aim of the study is to identify the determinants that affect the risk of insolvency of companies in Poland as well as propose a model of the effects of companies' insolvency based on the profiles of risk factors and the actions as well as instruments to successfully manage the risks of default. We used Logit Model and Panel Data. Our findings suggest that appropriate debt management, as well as the need for synchronization of receipts and expenditure, which should secure the current payments in a short run is crucial in identifying and reducing the risk of insolvency, in a short term (in relation to all groups of companies). However, in the longer term, consideration should be given to the different factors that can allow the identification of the risk of insolvency, which may further allow the entrepreneurs to make quick response, or spread out over time the operations (e.g. restructuring) and thus allow avoiding the insolvency. Hence, in private companies a sustainable performance should be instituted by the board of directors.