Using altmans multivariate approach in business failure investigation (A case study of Uchumi supermarket ltd 2000-2005)

Abstract

Business failure represents a significant outcome of entrepreneurial activity and yet remains an underdeveloped area of research. This study focuses on use of financial statements and fundamental accounting ratios as vital information in establishing both state of management and state of health of a business. Sometimes in the hindsight questions are raised as to whether the accounting fonnat can reveal all to the readers and the financial analysts. This study uses the USLs five year fmancial statements and ratios for the period June 2000 to June 2005. The specific ratios are factored into the Altman's Multivariate Z-score Model to investigate what may have caused the company's sudden business failure in June 2005, under the managers with over 30 years experience in Large Scale retail business in Africa. Researchers have used various alternative methods for analysis and predicting business failures but a clear overview and discussion of what the financial statements should reveal varies between businesses. More in particular, this study extensively shows that the Altman's Z-score model can effectively be used to provide a clear insight into and trace the path of fmancial deterioration towards business failure. Using descriptive statistics, Pearson product moment of correlation and bivariate regression it is important to recognize the complex, contextual nature of business failure. These measurements showed a high degree of correlation or collinearity with each other. Effects of each independent variable were done using multiple regression analysis from which multiple comparisons between the results of the research data were made to draw conclusions on Uchumi Supermarket Ltd's business failure in June 2005. In assessment, financial ratios within Altman's context show that business failure is markedly significant when the Z-score deteriorates towards the recommended Altman's Z score of insolvency, which is below 1.81. The analysis within Altman's classification results show Altman's Multivariate Model as an important tool for use in financial management, an excellent predictor and indicator of business failure at within a period of two years. The model is also suitable for use in financial management, credit worthiness analysis, undesirable investment and risk analysis for portfolio managers and individual investors.