A general model based on the DuPont system of financial analysis for identification, analysis and solution of a potential crisis in a business

Abstract

The purpose of this article is to create a general model using the data commonly available in the managerial accounting system for the signalization of a possible potential crisis. The critical level of the input variables influencing the return of equity (ROE) and return on sales (ROS) was theoretically determined based on the DuPont system of financial analysis. To determine actual amount of the input variables for the test of their critical amount in a real company, we considered their average amount based on a simple arithmetic mean. For the real analysis in a potentially threatened company, we considered one month as a time unit for the time interval in a range of 14 months. We determined the average actual amounts of the input variables using confidence intervals. Because of the relatively small sample, we used Student's t-distribution for the construction of confidence intervals of the input variables. An analytical model-based system approach based on analysis of the complex value chain was used. By the means of logical derivations and testing this analytical model-based system approach in a real company, we proved, that this model enables not only to determine the critical level of the input variables leading to a crisis in a business but also to calculate their new adjusted amount, which the business needs to reach so that a potential crisis can be solved. The presented theoretical model was successfully applied to solve a real potential crisis in a particular Czech company which supports the correctness and practical applicability of this general model. There are two main advantages of this model: 1) it can use the data commonly available in the managerial accounting system, 2) this model is generally valid, i.e., it can be used in any business producing goods or services.