The THE DOUBLE-EDGED SWORD OF SALES GROWTH: IMPLICATIONS FOR SMES INSOLVENCY RISK

Abstract

Research on SME insolvency is one of the most important areas in economy because it is crucial for economic growth which would not be possible without growing firms. These two phenomena - insolvency and growth are typically studied independently. This study brings them together by examining the interaction between sales growth and insolvency among small and medium enterprises (SMEs). On the dataset of financial ratios for Croatian SMEs by applying logistic regression with interaction effects, it is investigated how sales growth, leverage and liquidity affect the probability of insolvency. The results showed that sales growth decreases the risk of insolvency, but that it depends on the level of indebtedness of SMEs. The least risky are those SMEs whose sales growth is supported by an adequate level of capital. SMEs with high sales decline have the highest probability of insolvency even when leverage and liquidity are suitable.