Evaluation of Business's Financial Health Using Fuzzy Logic

Abstract

The financial health of the company is not only an important criterion when assessing its possible development; it is also employed in decisions about mutual cooperation with other subjects. A variety of financial indicators and models have been created over the years which are used in a company qualification in terms of the achieved results. Diagnostic and predictive models are used in the financial analysis and multi-criteria evaluation which include selected ratio indicators, usually with different weights. The maximum completion of all indicators, i.e. reaching the optimum value is often impossible; however, one can choose a compromise between a higher realization of one of the objectives at the cost of the worse results in another goal or goals. Additionally, the included indicators may not affect the particularities of the business. For this reason, based on a comparison of the most commonly used models, it is possible to create new models that can take into account other factors affecting the company in the course of its business operations. The aim of this article is to develop a model for assessment of a company´s financial health using fuzzy logic because a combination of traditional models and fuzzy logic increases the model dynamics. The proposed model takes advantage of fuzzy logic enabling the user to recognize the contribution of each included variable to the overall result. Its use is demonstrated on an actual example that draws from the experience of a manufacturing company.