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

Z (Public)

Z1 (Private)

Z2 (General)

There are other credit risk assessment models too

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?

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:

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

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