Prediction of business failure: A funds flow approach

The purpose of this paper is to assess the usefulness of financial ratios derived from working capital-based funds flow information to predict the failure of US industrial firms. Unlike cash-based funds flow ratios, used in the previous papers, capital-based funds ratios are less volatile, therefore they are expected to be better predictors of business failure. Moreover, the paper utilizes a more general definition of business failure than the legal definition. The analysis is carried out using a stepwise logit procedure. The results indicate that working capital-based funds flow measures are superior to cash-based funds flow measures in business failure prediction models.