What is the Relationship Between Sales Growth and Insolvency Risk?
Sales growth is essential for enterprises’ survival and financial growth. If enterprises manage to achieve sales growth, expansion of the whole enterprise can be accomplished. However, does it always have only positive effects? When enterprises take a lot of debt to accomplish desired growth, sometimes it can cause the situation where earnings are not enough to cover debt. If the enterprise isn’t collecting enough cash, it can push the enterprise to miss a payment on its debt, trigger a series of events that can lead to insolvency. This is the goal of the paper – to explore relationship between sales growth and insolvency. Data sample for this research is consisted of financial statements and insolvency status of 4271 SMEs in Croatia. The results confirmed that there is a relationship between sales growth and insolvency. Most of SMEs with sales growth are solvent but, there is 30% of SMEs with sales growth that are at the same time insolvent. SMEs with better financial indicators have higher chances to be solvent and growing in the future as oppose to SMEs with poor financial indicators. Liquidity is more important for ensuring solvency than for accomplishing growth while better turnover and faster collection of receivables are more important for growth than for solvency.
Keywords - SMEs Growth, Insolvency Risk, Sales Growth, Financial Indicators