– Note also that Critical Suppliers to the company may pose specific credit risk
DSO Impact … an example
Actual Q3 A/R Q3 Sales \ DSOs = Hypothetical DSOs Q3 Sales \ Q3 A/R =
– Project Finance – Structured Transactions – Leases with Recourse
Derivatives Exposures
– FX, Interest Rate Risk, Commodities etc.
Collateral Risk
– Parent or Third Party Guarantees – Commercial and Standby Letters of Credit
Plan
Methodology
Improve Profitability
Credit Strategy/ Plan
Credit Strategy & Risk Tolerance
Credit Strategy Statement and
Risk Tolerance
Coordination with Business
Specific Quantifiable Objectives Management Review
Corporate Credit Risk
Companies are exposed to significant levels of credit risk emanating from different sources
Accounts Receivables Other Notes Receivables Buyer and Franchise Financing With Recourse Financing
Credit Risk Management
Enhancing Your Bottom Line
The AFP 23rd Annual Conference New Orleans November 3-6, 2002
Ebrahim Shabudin Managing Director Deloitte & Touche LLP
Credit Background
Thorough identification and accurate measurement of credit risk, supported by strong risk management can help improve the bottom line …..An uncertain and volatile economic environment significantly impacts this ability …..The desire to grow and turn in outstanding results has a tendency to put pressure on the checks and balances within businesses
Value Proposition
Credit plays a critical role in “selling” products and services
– Expands revenue opportunities with creditworthy, incremental customers – Utilizes innovative structures to support business relationships Effective credit risk management limits credit losses and provides stable cash flows and earnings – Marketplace rewards companies exhibiting earnings and cash flow stability with higher P/E multiples – Marketplace penalizes credit induced volatility and “surprises” Raises questions about quality of management
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Credit as a Facilitator
Credit risk management is important
– Credit is a facilitator of business growth and performance – High business margins tend to attract lower quality clients and therefore higher risk profile to manage – Clients (buyers) may be concentrated in selected industries and provide limited portfolio diversification opportunity – Poor credit risk management resulting in negative impact to bottom-line is heavily penalized by markets
*
Company A $295,396,000 $261,201,000 124*
Peer Average
51.3 D Cash
51.3 $261,201,000 $122,002,230
+$173,393,770
Equals 295.4M/261.2M x 90(or number of days in sales period)