Empirical research to identify early warning indicators of insolvency in small and medium-sized enterprises (SMEs)

Abstract

In Europe, the contribution of SMEs is enormous in terms of job creation and added value, although in recent years worrying levels of business failure and disappearance have occurred. These circumstances have led various researchers and international organisations to recognise the need for indicators that will enable the early detection of insolvency risks so that preventive and corrective measures can be taken. In this context, Directive (EU) 2019/1023 obliges EU Member States to define early warning indicators of insolvency, and in most cases has been transposed into the respective national regulations. The present paper aims to identify financial and non-financial indicators of insolvency risks in SMEs, to facilitate early detection. To this end, we analyse a sample of 1,736 Spanish SMEs, studying their behaviour for the period 2010-2020. Certain financial and non-financial factors are identified as early warning indicators of insolvency, a result that will prove useful both for the self-diagnosis of insolvency and for the design of restructuring plans to enhance SMEs’ chances of survival.

Keywords

• Insolvency
• Early warning indicators
• Business failure
• Survival
• SMEs
• Directive (EU) 2019/1023