Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
http://www.creditmanagement-tools.com/credit-notation-c1-r15.php
My account:
ABOUT
RISK MANAGEMENT
COLLECTION
CREDIT MANAGEMENT
Subscribe
Credit Notation
The business creditworthiness assessement tool presented here is used and improved in Credit Management services of many companies. Simple and easy to use (a few minutes needed to perform an analysis), it is including all the main criteria to perform this analysis while producing useful advises in credit risk decisions you have to make with your customers. This tool will give you for each client recommendations to avoid bad debts.
Use the simplified credit rating with clients who refuse to disclose their balance sheet and income statement, which is common in several countries. In some countries (notably the Middle East) commercial culture is that these documents are confidential and are only internal management tools for managers. In this case, the solvency assessment will be based on others criteria like compliance and payment behavior, which is of course reflected in the tool.
Tools download:
Credit notation Credit risk Kit Easy credit notation
1 of 2
1/18/2014 9:36 PM
Understand and analyze the balance sheet < Assess your customers
http://www.creditmanagement-tools.com/understand-and-analyze-the-bala...
My account:
ABOUT
RISK MANAGEMENT
COLLECTION
CREDIT MANAGEMENT
Subscribe
Assets are divided into two parts : current assets: accounts receivables, inventory, work in process, cash, etc., that are constantly flowing in and out of a firm in the normal course of its business, as cash is converted into goods and then back into cash, fixed assets: land, buildings, equipment, machinery, vehicles, leasehold improvements, and other such items. Fixed assets are not consumed or sold during the normal course of a business but their owner uses them to carry on its operations. If we look to the company's financial resources (owners equity + liabilities) and the assets, we can determine the part of the owners equity which finances the current assets; in other words the business activity of the business. This is the working capital. Conversely, more working capital is weak, and the working capital requirements financed by the liabilities (negative treasury), more the company is financialy weak and depends on its creditors (banking, suppliers) to maintain and develop its activity.
Dynamic view of the balance sheet: the working capital and the working capital requirements
1 of 3
1/18/2014 9:34 PM
Understand and analyze the balance sheet < Assess your customers
http://www.creditmanagement-tools.com/understand-and-analyze-the-bala...
2 of 3
1/18/2014 9:34 PM
http://www.creditmanagement-tools.com/the-balance-sheet-key-ratios-c1-...
My account:
ABOUT
RISK MANAGEMENT
COLLECTION
CREDIT MANAGEMENT
Subscribe
Solvency Ratios
Total liabilities / total equity : Its showing the proportion between equities (internal financing) and debts (external financing). The more important the internal financing is, the lower is the risk of bankruptcy. Who really owns the company ? Shareholders Bank Equity / (equity + liabilities) = % Bank loans / (equity + liabilities) = %
Creditors (including suppliers) short term liabilities / (equity + liabilities) = % The total makes 100%. The higher % are in the high part, lower is the risk. Loan ratio: Loans payable > 1 year / Equities. Shows the banking debt level. The lower it is, the less the company is financially dependent on its banks. Should not exceed "1" in which case the banking dependence level is too high.
1 of 3
1/18/2014 9:35 PM
http://www.creditmanagement-tools.com/the-balance-sheet-key-ratios-c1-...
Accounts receivable falsification: here is an assessment which shows seemingly a correct financial situation. Equity Liabilities Equity Liabilities &
Assets
413 5652
4983
895 5170
receivable
If we look in details to the balance sheet we can see that the DSO is 144 days, which is very high. Why ? because this company underwent 2 unpaid for a total amount of 2 millions euros without reflecting it in their balance sheet and income statement which are in fact completely wrong. Normally, the unpaid invoice should have been written off, which impact the EBIT and the Net income which become largely negative. The loss comes in reduction from equities to -1.1 million euros. The "fair" financial statements are completely modified like below: P&L Gross revenues EBIT Net income K 12 625 -1484 -1735 Assets K Equity liabilities Equity Liabilities and K
413 3652
2983
-1105 5170
receivable
Current assets are largely lower than the debts short terms. The company is unable to refund its debts and goes for bankruptcy (what happened a few months after the publication of the false financial statements).
Be attentive with the figures leaving the standards. A daily sales outstanding of 144 is sufficiently high to doubt on the accuracy of the accounts and to ask explanations to your customer. A similar falsification is very common on the inventories valorisation: when a company overestimate inventories values the net income is higher than it should be as it should be impacted by the devaluation of obsolete inventories.
Your name :
Your comment :
2 of 3
1/18/2014 9:35 PM
Analyze the Profit and Loss account < Assess your customers
http://www.creditmanagement-tools.com/analyze-the-profit-and-loss-acco...
My account:
ABOUT
RISK MANAGEMENT
COLLECTION
CREDIT MANAGEMENT
Subscribe
13
The financial analysis is the cornerstone of the valuation of the solvency of your clients. Don't panic! It is simple. The most important is: the understanding of the balance sheet and of the profit and loss account, their analysis with key indicators. We are not going to get lost in interminable calculations but we will analyse simply what is the most important. By chance, it is in front of our eyes on first pages of the financial statements of your customers.
Compare the evolution of the turnover and the profitability on last 3 financial years (5 so possible) to determine the medium-term viability of your client.
Turnover and profitability are two key indicators for any business, second one even more than the first one. As long as a business is profitable the risk of insolvency is low. A turnover increase without profitability or strengthening of shareholders equity weakens the business. Why? Simply because the need in cash rises with the increase of the turnover while financial resources do not increase. Consequently, problems of financing of growth and cash difficulties can appear, which can be controlled only with thirds contributions (banks, factoring, credit given by suppliers etc). This will reduceh the financial autonomy of the company.
1 of 3
1/18/2014 9:32 PM
Analyze the Profit and Loss account < Assess your customers
http://www.creditmanagement-tools.com/analyze-the-profit-and-loss-acco...
This analysis will help you not to get fooled by an "artificial" positive result or to not stop your analysis to a net loss but based on an intrinsically profitable and viable business.
Intermediate balance
Interpretation
Trade margin
Relevant indicator to determine the gross margin of an activity of reselling such distribution or trading. Represents the creation of value that the company provides to goods and services purchased from third parties. The value added must be sufficiently high to absorb all other expenses of the company. Remaining amount after deduction of operating
Value added
expenses to value added. It is a key indicator of profitability and business performance as it is independent of the financial policy of the company. EBITDA should maintain and develop the means of production and pay the capital invested.
Operating profit
Operating profit includes the amortization of fixed assets and provisions for risk (eg accrual of bad debts). This purely financial result is often negative because firms are generally consumers of financial products
Financial result
(lines of bank overdrafts, bank loans, factoring etc ...). A significant negative financial result often reflects a weak financial structure and an excessive recourse to banks. Warning!
Final result calculated from operating income and expenses. It is independent of taxation and exceptional income and expenses. This result relates to unusual activity. For example, a capital structure transaction can create an exceptional result. Be careful because it can distort the true profitability of the business and distort an analysis that would be based solely on net income. The net income represents the profit or loss at the end
Exceptional result
of the year (the difference between total revenue and total expenditure). It is increasing (if positive) or decreasing (if negative) the equity. If positive, it can remain invested in the company or be partially distributed to shareholders as dividends.
The most important is to determine what are the main part in the P&L contributing to the net income (positive or negative) and to understand what is the size of the company, what are its strengths and weakness, the evolution in its turnover and profitability...etc. These indicators allow you to refine your understanding of the business by zooming into some key points generating income or losses. A detailed analysis will also help you to check if there are some manipulations in the financial statements.
13
2 of 3
1/18/2014 9:32 PM
http://www.creditmanagement-tools.com/the-tangible-net-worth-c1-r770.php
My account:
ABOUT
RISK MANAGEMENT
COLLECTION
CREDIT MANAGEMENT
Subscribe
10
TNW is a concept very down to earth. All intangible valuations, ie intangible assets: patents, expenses, goodwill, licenses and all other intellectual property that the company may have are excluded in the calculation.
1 of 3
1/18/2014 9:35 PM
http://www.creditmanagement-tools.com/the-tangible-net-worth-c1-r770.php
10
Your name :
2 of 3
1/18/2014 9:35 PM