# How to calculate and assess credit risk

Probably the most famous method of calculating credit risk is the Z Score.

The Z-Score was developed in 1968 by Dr. Edward I. Altman, Ph.D., a financial economist and professor at New York University’s Stern School of Business.

The Z-Score bankruptcy predictor combines five common business ratios, using a weighting system calculated by Altman to determine the likelihood of a company going bankrupt. It was derived based on data from manufacturing firms, but has since proven to be effective as well (with some modifications) in determining the risk a service firm will go bankrupt.

The results indicated that, if the Altman Z-Score is close to or below 3, it is wise to do some serious due diligence before considering investing. The Z-score results usually have the following “Zones” of interpretation:

1. Z Score above 2.99 -“Safe” Zones. The company is considered ‘Safe’ based on the financial figures only.
2. 1.8 < Z < 2.99 -“Grey” Zones. There is a good chance of the company going bankrupt within the next 2 years of operations.
3. Z below 1.80 -“Distress” Zones. The score indicates a high probability of distress within this time period.

There are different veriosn of the Z Score http://www.exceluser.com/tools/zscore.htm

Z (Public)

Z1 (Private)

Z2 (General)

There are other credit risk assessment models too

http://www.creditanalyzer.com/models

Credit Analyzer has free calcultors for:

Z Scores

C  Scores

Simple Logit Model

S&P Median Value Model

Private Company Model

What method do you use to assess credit risk?

steve@bicknells.net

# Salary v’s Dividend – how much money could I save?

This has to be one of the most popular questions business owners ask their accountants, purely looking at it from a financial perspective I would recommend trying out these free calculators:

http://listentotaxman.com/index.php

This allows you to calculate the Tax and NI payable on Salaries

http://www.contractorcalculator.co.uk/Dividend_Tax_Summary.aspx?uid=0&logon=False&psalary=50000&div=1&status=OutsideIR35&pyt=LimitedCompany&expenses=3000&other=0&pension=0&tc=747L&age=30&salary=12000&rate=25&rt=Hourly&rt2=Hourly&weeks=44&dwpw=5&dwpw2=5&hours=37.5&dni=3000&tty=2011&rate2=25&weeks2=44&hours2=37.5&status2=OutsideIR35&psalary2=50000&mir=0.05&ma=200000&mp=25&cid=0&vat=1&vi=False&cby=1&ar=1&gs1=0&gs2=0&gs3=0&gs4=0&nd=80000&pbt=1&dpo=16-Jul-2011&dop=01-Jan-0001&inv=1&hpd=11&me=150&vt=Car&mpw=0&mpc=0&pt=Monthly&ace=500&mt=Parasol&wl=InsideLondon&uds=Basic&Host=LOCAL

This link calculates the tax on dividends (Dividends are paid after the company has paid Corporation Tax which is 21% for small companies)

steve@bicknells.net