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Credit Articles
In a company, purchases are often the most important item in the Profit and Loss statement (P&L), any situation that may affect the suitable supply of raw materials at a reasonable price is a crucial factor that may deteriorate financial results.
Inventories are an investment for the company, which means costs and risks due to loss of value, damage, etc. For these reasons, the inventories must be agile and they must have a fast turnover, it applies for raw materials as well as for products in process or finished. As it is not always possible, it is important to know why the company must keep these inventories and if it is possible to reduce them...
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Discrimination Variables for Suppliers / Raw Materials Raw materials market: monopoly or competitive market
Dependence on one or few suppliers
Capacity of negotiation with the supplier
Source of raw materials (delivery risks)
Factors that may affect the raw materials price (price control, international price, etc)
Substitute raw materials (quality and price)
Coordination between sales rate and production rate
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credit providing is the main function of financial entities, receivables coming from loans make up most of the entity assets and provide its largest source of income and profits. These entities, in general, do not provide their own money, but money deposited by customers, it means, by all savers.
BPR has prepared a series of documents about credit analysis, whose main topic are all factors that may affect a credit, which must be taken into account when providing it.
In this first article we will introduce the process of credit providing and we will talk about Environmental Risks, as the first key factor to be analyzed.
Environmental Risks
The goal of a company is to produce goods and sell them in order to get profits. The company lives in domestic, national and international environments where their markets are, where the company gets their equipment and raw materials, where it gets its staff and where it gets most of its ideas and knowledge. In this world also their competitors live.
The world outside the company is constantly changing and it has several types of influence on the company, some of them are favorable and others are harmful. One of the skills of top management must know how to take advantage of favorable factors and counteract the harmful ones.
At any moment, one or more of the external factors may have temporarily (or for a long time) a restrictive influence on the company activities, then, it is necessary to analyze the environment; this must include, among others, assessment of the following factors:
Political /country / sovereign risk
a. Expropriation: It refers to a risk derived from the faculty the State has to expropriate goods of people (individuals or corporate entities) with or without compensatory payment.
b. Convertibility: is the sovereign risk of limiting the free money conversion, inherent to assets or liabilities in foreign currency.
c. Block of Money Transfer: is the sovereign risk a country has to block foreign currency transfer to other countries.
Liquidity Risk
It refers to the risk of not having enough money, in a specific moment, to pay liabilities in time.
Exchange Rates Risk
It is the risk of favorable or unfavorable transactions due to exchanging rates of different foreign currencies.
Regulatory Risk
It includes, among others, risks derived from the following eventualities:
- Changes in the Constitution of a country
- Legal changes
- Procedural changes
- Retroactive regulation
- Changes in tax system
Counterparty risk
-Market risk: it is the risk inherent to the person who the business relationship is established with, not to the issuer.
-Settlement Risk: it refers to the risk of having any problem at the settlement of a financial transaction. For example, when a payment is supported by a check that is being processed by the bank, there is a risk of having problems if the bank does not pay the check.
Commercial Risk
It is the typical credit risk, defined as payback capacity.
Social Risk
- Guerilla
- Drug trafficking
- Crime
- Violent strikes
- Bombs
- Kidnapping or extortion
Documentation Risks
- Poor documentation (contents / structure)
- Lack of documentation or it is not updated
- Small print (inconsistencies)
- Poor documents management
- Fraudulent documentation
Association Risk
-Cultural: is the risk of associating with parties that have cultural differences such as nationality, believes, principles, etc., these differences may lead to dissolve the association.
-Economic: There is a risk when partners belong to different financial status.
Sectors Risks
They are the risks which are inherent to the economic activity itself, such as:
- Plagues
- Economic actions
- Imports
- Dumping
- Industry unión
Natural Risks
- Tremor, Earthquake
- Drought, floods
- Frost
- Hurricane, bolt
This list does not include all environment risks, and they do not have to be assessed the same way. It is simply a check list to have in mind the most common risk elements and the risks that have more impact.
In the process of providing a loan the main goals are to identify those risks which are inherent to the activity of lending money, to derive conclusions about probabilities of pay back and to make recommendations about the proper type and structure of credit operations, in the light of customer needs as well as of the perceived risks, in order to maximize profits.
Based on previous statements, when an entity provides a loan to a customer, a credit analysis is done in order to determine which factors may alter the situation of the customer while the credit is in force and the possibility, hereby, of the integral repayment of the credit.
If we do not know how a business runs, we can’t properly assess all risks we face in case providing a loan to that business.
Those companies that pay their loans in a normal way are those that have a future, are those that have the capacity of surviving, it means, those which get profits, because profits ensure that the company will have the necessary capital to grow and innovate.
When we talk about the analysis of a company, we basically make reference to its current and medium term capacity to punctually fulfill its payment commitments, at the end of the loan, or in advance.
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Qualitative Analysis: current situation and prospectives of the business. Product’s life View...
The analysis of all products of a company is not only one of the most remarkable elements, but the core reason of its existence. Most of the time, knowing products will be crucial when giving a judgment about the company’s capacity to pay its loans.
This analysis must not be limited to the own company, but it must include its competitors in order to verify if the product itself is still interesting for the market, or if it is not consumed any more, which would mean, obviously, a serious problem for the company.
In a product’s life four stages may be seen:
Launching or starting – High Risk
The first stage in a product’s life is its launching into the market. Most of companies’ profits come from new products. However, to launch new products is a difficult process where great failures may be present too. Launching is slow and production is done by short series to meet the demand, which is still little.
Development and growing stage – Medium Risk
The product slowly opens its path into the market until sales increase at a faster rate. In this stage, competitors enter the market, trying to add differences to the product; differentiation starts.
Thus, distribution channels to reach all market segments become crucial. The innovative company starts losing the control and the monopoly of technology. In this stage, the number of companies acting in the market reaches its highest level. This strong competition controls prices and decrease profit margins. Many companies cannot support the fight and the market starts taking the less efficient companies aside.
Maturity phase – Optimal Risk
In this stage investments are not intended to widen capacity; they are now driven to productivity research. Increase of competitors reaches its most important level and due to initial investment has been already reimbursed; it is possible to have surplus on liquidity and / or better profit margins.
All potential customers have already bought the product; now, new sales come from replacements or from new customers because of population increase. Market share of all companies is the main barrier that blocks the entrance for new competitors.
Declining Stage - High Risk
In this stage the product declining begins. The weakest companies leave the market first. This declining may happen because the market rejected the product, which will affect all competitors the same way, or due to different reasons that pertain exclusively to the company.
Alignment to the Target Market View...
The first step when analyzing a customer to provide him/her a loan is to validate his/her level of alignment to the Target Market, which implies the following:
Levels of adherence:
The higher level of adherence (low percentage of exceptions) the lower individual risk level, because the customer has clear strengths of surviving and does not show weaknesses or risk factors.
On the other end are those customers that scarcely fulfill the minimum alignment levels, they will require a deeper and stronger analysis due to their strengths are reduced and / or their risk factors are increased.
Starting point:
Due to mentioned above, it is very important to have as starting point the alignment level of each company to be analyzed, showed either by the number of RAACs (Risk Assets Acceptance Criteria) or by the percentage of fulfillment.
In conclusion, the analysis of strengths and weaknesses done when defining the Target Market must be taken into account in the admittance stage, giving more emphasis to those variables that show weaknesses.
RISK ASSETS ACCEPTANCE CRITERIA (RAAC):
Risk Assets Acceptance Criteria (RAAC) are qualitative and quantitative parameters chosen per sector, in order to select the companies that have the best performance in each sector.
RAACs are determined independently for each sector because depending on the sector, qualitative and quantitative variables behave in a different way. For example, in the sector of department stores, companies usually manage cash sale, which means that receivables rotation is very fast (less than 15 days). If in this sector we choose a RAAC of 60 days receivables rotation, maybe all the companies fulfill the criterion, for this reason, this RAAC is not a real decision factor.
For choosing RAACs it is important to determine which RAACs are more relevant in order to determine strengths and weaknesses of the companies that make up the sector, and RAACs quantification must be based on criteria and it has to be related to the rating that was given to the corresponding sector.
Then, RAAC will allow organizing the companies of each sector and choose, by means of a comparative analysis, those companies which have a better alignment with criteria, it means, the ones which fulfill more criteria.
www.bprbenchmark.com
Marketing Articles
The goals of a Data Warehouse View...
Business intelligence is a set of concepts, methods and processes to make better business decisions, using information from various sources and applying expertise and skills to develop an accurate understanding of business dynamics.[1] From the technological point of view, it is a wide category of applications and technologies for gathering, storing, accessing and analyzing data in order to help the Company’s information users making better business decisions based on high-quality information.[2]
[2] Taken from a slide of Business Intelligence course. Profesor: Mauricio Ruiz Valdivieso. Universidad de los Andes
PROCESS TO DEFINE TARGET MARKET View...
The main goal of the Process to Define Target Market is to establish an instrument of permanent and updated information that enables companies to identify critical success factors, detect opportunities and risks, assume preventive or corrective market positions, and plan and implement strategies in the focus of the market to preserve the Company interests.
A summarize of this Process to Define Target Market for corporate credit is shown in the BPR’s articles.
In this article:
Qualitative Analysis of Economic Sectors
Analysis of economic sectors is done to evaluate the following aspects for every sector.
Importance of the sector in the economy
Importance or dependence of the economy in certain sectors may determine strengths and, in some cases, structural weaknesses. Share of the sector in the GDP (Gross Domestic Product), in job creation, and in exports, among others, are positive factors that allow anticipating State’s support; whereas activities that have low job creation, manufacture sumptuary products or have high level of imports, may not hold permanent support.
Sector maturity
Maturity level of the economic sector is basically given by how long the corporate activity has been developing in the country. Efficiency levels, productive capacity and cash flow are better when the sector is more mature; however, it also implies that the activity has a high level of competition and companies in the sector must redesign their products and, in some cases, reconfigure the business.
Cycles and seasonality of sales in the sectors are basic risk elements that need to be understood. Cycles with longer waves of terms support structural strategic decisions and seasonality requires proper short term financial plans for good productive and sales planning.
Competitors
Depending on structure of competitors, the sector faces different risks or structural strengths. In monopolies (a single supplier) it is crucial to determine its entrance barriers and its permanence in the time. In oligopolic markets (few suppliers) analysis of competitors becomes critical. In markets of perfect competition (many suppliers) definition of the low cost producer and penetration of market become the basic supports for a successful permanence
Competitiveness
Competitiveness must be seen as a sum of strengths that support the presence of an economic activity, for example, cheap workforce, climate variety, nearness to shipping ports, etc.
Low levels of capacity utilization don’t allow generating scale economies. On the other hand, high levels of utilization anticipate us needs of structural enlargement which imply risks and opportunities.
Supply versus demand
Somehow, an integral part of the exercise is summarized here. Proper visualization of supply and demand curves allows concluding right market strategies, when facing risks of sectors whose two basic variables are clearly foreseeable.
Export vocation
A high level of exports in a sector is a sign of competitiveness or, at least, of good protection against outside competitors. Generally, levels of quality and price of exports sector offer advantages in comparison with activities that have not had the capacity of trying external markets.
Dependence on technology
It is necessary to set a parallel between requirements of technological advance of the activity and the reality of these developments. Differences may produce excessive production costs or, on the contrary, allow the easy entrance of competitors.
Dependence on raw materials
The risk of depending on one or few suppliers with a wide control of sale conditions is clearly a disadvantage in the sector, as well as volatility of international prices of raw materials. In these cases, it is recommended to analyze all consequences.
Previous points are not the only ones and they are not limited to. Good criteria must be predominant, to include in the analysis all those variables that may affect the risk quality.
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Research and Environment Projection
Per Economical Activity
At least once a year, it must be done an updating about macroeconomic vision of the country and of the main economic activities the corporate strategy is focused on.
Main goal of this research is to enable the Company to recognize its risks and opportunities in order to determine their relative weight in its products portfolio composition.
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Besides identifying Target Market, the Risk Process has the following goals:
1. To determine structural risks which affect different economic sectors.
2. Based on the previous goal results, to determine whether these current or future risks are or are not accepted by the Company. In case they are accepted, to define those protective elements that must be included for their proper management.
3. To establish the ideal portfolio distribution per economic sector in such a way that quality and risk diversification are kept.
4. To determine the economic sectors where products and services will get a better development.
5. To determine parameters or minimal conditions of companies acceptance for credit products.
6. To detect in the economic sectors those companies and/or users that answer in a proper way, from the risk point of view.
7. To identify customers’ behaviors and needs in order to develop new products.
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Choosing Market Target Companies View...
The process allows accepting companies with relative average alignment, it implies that they also have a higher risk level which must be recognized, managed and paid in a proper way. The wider the number of companies to be chosen is, the deeper vision of the sector will be. Choosing companies by means of risk criteria is not a simple statistic exercise. Good judgment in choosing RAACs and the analysis of alignment to specific criteria are crucial.
When companies that do not fulfill all RAACs are included into the Target Market, the risk management area must justify why, in spite of deviations, it is recommended to include them in the Target Market. The process then allows acceptance of exceptions, which are not critical to requirements established.
Process dynamics and results
Dynamism in the Target Market process is a necessary condition for its good performance. This exercise must be done at least once a year, but in case of meaningful changes in the economy as a whole or in specific sectors, it is necessary its updating and redefinition.
Once the list of companies for the Target Market is obtained, this must be compared to current customers. From this matching, three clearly defined groups can be seen:
Target Market and Customers – Loyalty
They are the companies that can be found in both groups, it means, validation of current customers which fulfill conditions established in choosing Target Market, and therefore the strategy to be followed is LOYALTY.
Target Market and NO Customers – Join
It corresponds to the group of companies from the Target Market which are not customers of the Company, the strategy is JOIN.
NO Target Market and Customers – Reduction
Defined as those customers of the Company which do not fulfill parameters of the Target Market, the strategy in this case is focused on PROTECTION and / or REDUCTION of their risk assets.
1. Analysis and Rating of Economic Sectors
2. Risk Assets Acceptance Criteria (RAAC’s)
3. Companies which have a better alignment with criteria
4. Target Market
Quantitative Analysis and Rating of the Sector View...
Historical figures of financial performance for the different economic activities are a good reflection of a sector’s health, they describe the economic cycles and their correlation with the internal and external macroeconomic variables, and they also allows determining their levels of dependence when facing a certain macroeconomic behavior.
In this article BPR shows the importance of quantitative analysis and the rating of the sector.
QUANTITATIVE ANALYSIS OF ECONOMIC SECTORS
Historical figures of financial performance for the different economic activities are a good reflection of a sector’s health, they describe the economic cycles and their correlation with the internal and external macroeconomic variables, and they also allows determining their levels of dependence when facing a certain macroeconomic behavior.
Applying these correlations to future scenarios also allows visualizing the positive or negative effects that could come and they are, in general, a good support to define the sector risk level we will face in the future. Proactive and futurist attitude in managing the risk is the most important cultural element.
RATING OF THE SECTOR
Once all sector researches are done, it is necessary to establish an assessment or rating of the sector, which simply marks the health level and, therefore, the growth rate each sector wants.
At the same time, substandard ratings will indicate us a strategy of reduction and/or leaving the sector, thus the portfolio composition can be reorganized:
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Process to defineTarget Market
Steps:
a. Qualitative Analysis of Economic Sectors
b. Quantitative Analysis of Economic Sectors
c. Rating of the Sector
d. Risk Assets Acceptance Criteria (RAAC)
In the next marketing article:
Choosing market target companies
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RISK ASSETS ACCEPTANCE CRITERIA (RAAC):
Risk Assets Acceptance Criteria (RAAC) are qualitative and quantitative parameters chosen per sector, in order to select the companies that have the best performance in each sector.
RAACs are determined independently for each sector because depending on the sector, qualitative and quantitative variables behave in a different way. For example, in the sector of department stores, companies usually manage cash sale, which means that receivables rotation is very fast (less than 15 days). If in this sector we choose a RAAC of 60 days receivables rotation, maybe all the companies fulfill the criterion, for this reason, this RAAC is not a real decision factor.
For choosing RAACs it is important to determine which RAACs are more relevant in order to determine strengths and weaknesses of the companies that make up the sector, and RAACs quantification must be based on criteria and it has to be related to the rating that was given to the corresponding sector.
Then, RAAC will allow organizing the companies of each sector and choose, by means of a comparative analysis, those companies which have a better alignment with criteria, it means, the ones which fulfill more criteria.
www.bpr.com.co
Frequently Asked Question
Is the Proyekta service part of my subscription?
Yes, as a BPR subscriber, you have access to the master Proyekta file which you can download data into for advanced analysis and forecasting. Please see your customer service representative for further training.
Can I compare companies between countries?
Due to the nature of differeing accounting standards, the application does not support this feature at present.
Yes , as all financial are loaded in �Benchmark Standard Format�, comparison between companies is possible.
What is the Proyekta part of the service?
Proyekta is a very useful tool and you should familiarize yourself with its use, by reading the BPR manual. It has a few faults�it is not necessarily the easiest tool to set up, and there are parts of the Excel file it uses that is in Spanish. We are working out a few bugs with this, but on balance, it works fine for Poland and Romania, as well as Colombia.
Wat is the Selekta part of the service?
Selekta is essentially a screening too, which allows you to select companies according to certain criteria which you as the end user determine. Again, time spent reading the manual will prepare you to demonstrate this at its best.
Selekta allows the customer to perform a segmentation process within a sector, taking into consideration:
1. Geographical zones
2. Indicators
3. Losses and Gains (Expenses)
4. Balance sheet
5. Cash Flow In each of these options is detailed alternatives to choose.
Where are we planning to roll out BPR?
Our goal is to rol BPR out to as many countries as we can, as quickly as we can. It is no trivial task though, as it implies for many places significant additional data collection or purchasing. We have worked on prototypes for China and for the Financial sector in Latin America, but our goal is to make this as close to a global product as we can. In terms of immediate successors to BPR Poland and Romania, our next release will likely be Russia.
¿How do you classify the companies in Benchmark?
Companies in Benchmark are classified in the different sectors showed, according to the Economic Activity Code (ISIC) reported to official entities.
These are sectors that the system allows to create in order to perform a specific sector analysis taking into account the characteristics, features and needs of our customers.
In the Rating what does it mean the number that appears next to the ratio?
Each company's indicator is ordered from best to worst in a range from 0 to 100 points, where 100 is the optimal and 0 the worst. At the end it avareges each score or position for each indicator and provides the rating of the company against the sector.
Is it possible to find information on a company that is not loaded at Benchmark?
BPR carried out searches on official sources, if a certain company reports its financial statements to these sources it is immediately loaded into Benchmark and notified the user.
• Are there any special software requirements for BPR?
BPR works best with Internet Explorer *insert versions*, and Firefox. For best results, Excel Version??is recommended
Excel 95 or better
Where possible, the data is updated quarterly and as reported.
What is the History of BPR? Has it been successful elsewhere?
� What is the History of BPR? Has it been successful elsewhere?
BPR originated in the Colombian marketplace, the brainchild of two former Citibank executives, Enrique Brando and Guillermo Rico. One of whom was know internally at the bank by some executives as the best credit analyst in the group. They started their business over 12 years ago, and have built it into the leading service of it�s kind in Colombia. ISI acquired a articipation in the business just a little over 2 years ago. Today BPR has over 300 institutional customers in Colombia, and is used by virtually every major bank and financial institution in the country, as well as the finance departments of multinationals and important local corporations. Poland and Romania are the first markets which are using their model on new country datasets.
What is the History of BPR? Has it been successful elsewhere?
BPR originated in the Colombian marketplace, the brainchild of two former Citibank executives, Enrique Brando and Guillermo Rico. One of whom was know internally at the bank by some executives as the best credit analyst in the group. They started their business over 12 years ago, and have built it into the leading service of it�s kind in Colombia. ISI acquired a articipation in the business just a little over 2 years ago. Today BPR has over 300 institutional customers in Colombia, and is used by virtually every major bank and financial institution in the country, as well as the finance departments of multinationals and important local corporations. Poland and Romania are the first markets which are using their model on new country datasets.
¿How do you classify the companies in Benchmark?
Companies in Benchmark are classified in the different sectors showed, according to the Economic Activity Code (ISIC) reported to official entities.
What is my commission for sales of BPR?
The commission plan for BPR is identical to the standard ISI commission plan. It is another tool you can use to help you reach your sales quota. (BPR sales count toward sales targets of course.
Which is the difference between Real and Real C?
The sector defined as Real C contains the companies that report all their information to the Chamber of Commerce. This information is very consolidated so in most of the cases they only have total assets, total liabilities, total equity, Revenues and Earnings data. This lack of information denies the realization of indicators evaluation as rotations and others at risk. The Real sector information contains more information in the Balance Sheet and Income Statement so this allows a better and complete analysis of all financial ratios.
How can I find company in the Benchmark tool?
The main screen of the system allows searches by: Company Name, Activity code (CIU), Natural Person and Fiscal ID (Colombia NIT), this latter should not contain dots or verification digit.
What information does Selekta export?
In Addition to financial information, Selekta allows to export qualitative information of the companies such as:
� ID
� Founding date
� Business Purpose
� If the firm is reported in Clinton list.
� Contact details (address, phone, fax, AA, e-mail , Web site)
� Executive Information (name, title, e-mail)
Are the BPR ratings proprietary?
Yes, BPR ratings are determined according to a proprietary algorithm. It should be noted thought that these are not intended to be recommendations and are not credit opinion reports such as those put out by the likes for Moodys or S&P. Rather they are quantitatively, and should not be positioned as such. They are instead a quantitively arrived at benchmarking figures, for comparative purposes.
How can I get all the information about the company in a single file?
you can do entering into the company�s profile and clicking on an icon called �Export to Excel�, the tool will generates a flat file (PryKRea), where is all the quantity and quality information of the company.
Benchmark
Benchmark is an Internet system that provides on line business information from the banking, industrial and commercial sectors, and includes managing tools, to support the company financial and marketing decisions.
GMO Login
GMO is an on-line internet system to manage and support the sales force. It allows managers and sales executives to organize and effectively manage the sales process.
