Corporate Governance and Risk Management: Cash Flow Indicators in Credit Risk Prediction

Abstract

Credit risk management and its prediction are critical to the success of any organisation, as bad debts-a major source of credit risk-can lead to significant financial difficulties. While the issue of credit risk is prevalent in banks and the financial sector, it is also relevant for companies in non-financial sectors. Nevertheless, the prediction of credit risk in non-financial companies remains an under-researched area in the literature. The mandatory application of the international accounting standard IFRS 9 in 2018, which requires the estimation of expected credit losses in non-financial companies as well, highlights the need for reliable predictive indicators for both financial reporting and internal risk management, which is a key principle of effective corporate governance. This study examines the role of cash flow-based indicators in complementing traditional accrual-based measures in assessing and predicting credit risk from the perspective of companies managing their receivables. Using a sample of large non-financial companies over a five-year period, statistical analysis was performed with logistic regression in SAS Enterprise Miner. The results indicate that several cash flow indicators have explanatory value for fluctuations in credit risk, but are insufficient on their own for predictive modelling. The findings suggest that cash flow indicators should be integrated with other financial and non-financial measures to enhance credit risk assessment models, supporting better decision-making and overall corporate governance practices.