Predicting Financial Distress of Small and Medium-Sized Entities

Abstract

Unhealthy financial conditions may be widespread and cause long-term distress, resulting in constraints on investment activities, capital flows, and performance of firms. Thus, it is critical for businesses to recognise the factors that can lead to organizational failure and take appropriate steps to avoid such a situation. The current study examines the measurement of financial distress among 53 small and medium enterprises (SMEs) in Malang over a two-year period (2018 and 2019).Financial ratios used as predictors are the ratios of Liquidity, Leverage to Asset, and Return on Asset (ROA). The sample was chosen based on the completeness of SMEs' financial data from 2018 to 2019. This study included 53 SMEs, the majority of which were culinary, fashion, and digital start-ups. The finding of 5% significance suggested that the model could be used to forecast financial problems of SMEs in Malang.The results of this investigation revealed that a company's financial stability, profitability, and debt have a significant effect on its ability to survive bankruptcy. R Square of 0.592indicates the uncertainty which can be expressed by an independent variable to be 59.2%.