Corporate Profitability Through Credit Management Efficiency


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Slide show of speech delivered to national convention of the Credit Management Association of the Philippines

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Corporate Profitability Through Credit Management Efficiency

  1. 1. Profitability Through Credit Management EfficiencyRaoul Villegas
  2. 2. Achieve Efficiency Through Focus Tune out “noise.” Concentrate on key credit factors. Increase capacity of credit pipeline.
  3. 3. Account and Portfolio Profitability In ideal world, battle over before the fight.
  4. 4. Account and Portfolio ProfitabilityYou don’t lose what you don’t put inthe middle – but you don’t winmuch either.
  5. 5. Account and Portfolio Profitability Quality of information and analysis wins – not the work out.
  6. 6. Economy of Effort Find the right factors to drill down. Blunt tools needed, not fine ones.
  7. 7. Credit Segmentation vs. Wholesale Retail
  8. 8. Credit SegmentationTrade Credit vs. Other Credit
  9. 9. Credit Segmentation CORPORATE…small or Mediumbusiness.
  10. 10. Decide What You Want Tolerance for loss? Tolerance for payment delay? Win share? Liberal vs. strict policy?
  11. 11. Decisions Begin From the Top
  12. 12. Credit Decision: Projection of Payoff
  13. 13. Credit Decision: Expected ValueMaximize P and minimize (1-P)
  14. 14. Consumer Credit Risk Factors
  15. 15. Ratio of Balances to Limits
  16. 16. Age in Months of Oldest Credit Card
  17. 17. Number of Recent Inquiries
  18. 18. Number of Discrete Card Accounts
  19. 19. Auto Loss Claims and Poor Credit
  20. 20. Homeowner Loss Claims and PoorCredit
  21. 21. Absolute No. of Accidents and Credit
  22. 22. Poor Credit & High Loss Claims
  23. 23. Factors on Trade Credit Efficiency Credit Policy. Tools and Execution. Reporting.
  24. 24. Trade Credit = Trade Offs.
  25. 25. Tools: Activity Ratio Analysis Average Collection Period. Days of Inventory. Days Payables Outstanding. Cash Conversion Cycle. There is more…
  26. 26. Tools: Re-cut Data in New Ways Average Collections per Day. Average Disbursements per Day. Net Direct Cash Flow Per Day.
  27. 27. Alternative Measures Average A/RAve. Collections Per Day = Days A/R Outstanding Average A/PAve. Disbursements Per Day = Days A/P OutstandingNet Direct Cash Flow Per Day = ACPD - ADPD
  28. 28. Core Measures Current Ratio. Quick Ratio. Working Capital. Net Worth.
  29. 29. Trade Credit Reporting Depends on what management wants to know. Metrics: quantifiable and comparable. Must enable action!
  30. 30. Small Business vs. Corporate
  31. 31. Focus on Owner & Cash Flow Most SME’s fail due to poor cash flow planning.
  32. 32. Keys to SME Credit Evaluation Analyze business plan/industry. Analyze cash flow. Keep eye on collateral.
  33. 33. Sober SME Credit Evaluation Liquidity and Solvency. Activity ratios. Leverage ratios. Validate, validate, validate!
  34. 34. Other Useful Metrics Cash burn ratio. Cash as % of IBD.
  35. 35. Corporate Credit Understand the business model and the industry. Know the accounting. Income earned not same as revenue collected.
  36. 36. The Most Powerful Equation inCorporate CreditAssets + Exp. = Liab. + Eq. + Rev. “Assets plus expenses equalsliabilities plus equity plus revenues.”
  37. 37. One can determine: Quality of revenue. Proper matching of expenses. Misreported balance sheet valuations. Quality of cash flow.
  38. 38. Traditional Corporate Credit Metrics Liquidity. Leverage. Activity. Returns.
  39. 39. Key Corporate Credit Metrics Working capital. Asset turns. Margins. ROA and history thereof. Cash flow – OCF and FCF. Equity to liabilities.
  40. 40. Follow the Cash Other ways out don’t pay aswell. Discipline in analysis wins. Know the odds.