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
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
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
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
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
Improve Profitability
Credit
Plan Strategy/
Credit Objectives and Risk
Peer Average 51.3
Hypothetical
D Cash
DSOs
51.3
Q3 Sales
$261,201,000
\ Q3 A/R = $122,002,230 +$173,393,770
* Equals 295.4M/261.2M x 90(or number of days in sales period)
stability with higher P/E multiples – Marketplace penalizes credit induced volatility and “surprises”
Raises questions about quality of management
Corporate Credit Risk
– 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
– Note also that Critical Suppliers to the company may pose specific credixample
Actual Q3 A/R Q3 Sales \ DSOs =
Company A $295,396,000 $261,201,000 124*
Credit Strategy & Risk Tolerance
? Credit Strategy Statement and Risk Tolerance
? Specific Quantifiable Objectives
? Coordination with Business Plan
? Management Review Methodology
– 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
Effective credit risk management limits credit losses and provides stable cash flows and earnings – Marketplace rewards companies exhibiting earnings and cash flow