A customization of modefinance s Credit Limit, according to customer needs.

Transcription

1 A customization of modefinance s Credit Limit, according to customer needs. Andrea Sorrentino andrea.sorrentino@modefinance.com facebook.com/modefinance linkedin.com/company/modefinance

2 AGENDA 1. MODEFINANCE 2. OUTLINE 3. CUSTOMIZATION 1. THE MORE CREDIT LIMIT: WHY THE CUSTOMIZATION IS NEEDED? 2. THE MODEL 3. THE BENCHMARK 4. CONCLUSIONS 5. CREDIT EVOLVING OUR VIEWPOINT

3 modefinance modefinance is specialized in the financial consulting and companies creditworthiness evaluation. Thanks to its own methodology for credit risk analysis, modefinance provides different products and services to satisfy every business need belonging to a modern credit and risk management. CREDIT REPORT The companies who would like to monitor their customers, suppliers and competitors; Banks, financial consulting companies; Insurance companies. STATISTICAL ANALYSIS Public institutions; Research organizations; Associations. MARKET SEARCH The companies who seek the best suppliers, customers and partnerships. Banks. INTERNAL CREDIT RISK PLATFORM The companies and the banks who would like to use internal data for the credit risk assessment.

4 modefinance - the MORE rating MORE Multi Objective Rating Evaluation, the methodology of modefinance for Company Financial Risk Assessment. Private & No Public Info Enterprise Financial Risk Assessment Financial Info MORE permits the coherent and accurate integration of all information about a company for evaluating the accurate Financial Risk Assessment. All modefinance products and services are characterized by a worldwide recognized transparency, accuracy and objectivity thanks to the use of self-owned methodology for the risk analysis MORE. Objectivity A clear source of the information used. A strong and direct interaction between financial data and final analysis of financial risk. Transparency A clear analysis of economic and financial quality of the companies. A modern, efficient indicator of the quantification of financial risk. Comparability Completeness and comparability of the information used. Innovative and efficient methodologies.

5 modefinance - the MORE Credit Limit MORE Credit Limit is the estimation of the amount of maximum credit that is possible to assign on a commercial relationship with the analyzed company with an outlook of one year. modefinance used the following values associated with the company analyzed while computing the credit limit: Rating Credit rating is an opinion that is based on financial trustworthiness of a company: the better the rating, the higher the credit limit. It also represents the capability of the company to access to external funding. Years Number of majors suppliers Cash Cycle It is well known that a startup company is much riskier than a company that has been operating in the market for a long time. It represents how many different companies are providing goods and services, using the 80% of the total purchasing value. It is a measure of the average number of days that a company takes to collect revenue after a sale has been made. The lower DSO value, the higher the credit limit. It is important to compare those value with the average of the sector. Total costs of suppliers This value represents the total costs of suppliers for a company in one year. The total costs are integrated by the propensity of each sector s average amount of spending for suppliers. If the P&L account is missing, modefinance assumes bank approach: tangible net worth of the company.

6 modefinance - the MORE Credit Limit Major suppliers MORE Credit Limit studies the distribution of the suppliers costs, taking in account the total costs of major suppliers.

7 AGENDA 1. MODEFINANCE 2. OUTLINE 3. CUSTOMOZATION 1. THE MORE CREDIT LIMIT: WHY THE CUSTOMIZATION IS NEEDED? 2. THE MODEL 3. THE BENCHMARK 4. CONCLUSIONS 5. CREDIT EVOLVING OUR VIEWPOINT

8 Outline Feb 27 th, 2013 we received an from Mr. yyy: «I have been struggling a bit to put down in words what we would like and to collect some examples of cases where we feel the standard limits are too generous»

9 Outline The credit risk assessment is a science since late 60 s whereas there does not exist a unique credit limit quantification theory. The relationship between client and supplier is so specific, that any information provider should take it into account, in order to provide a reliable credit limit amount. Normally this is not possible because such information is private.

10 Outline Q: Why do we need private information? A: Let s start from the CREDIT LIMIT definition: The CREDIT LIMIT is the estimation of the amount of maximum credit that is possible to assign on a commercial relationship with the analyzed company. The quantification of the limit shall be based on: Public info such as: The likelihood that a company may pay its debts in the next 12 months i.e. MORE Rating + Status. Liquidity of the company; Size and sector; Years in Business; Private info such as: The importance of the client for the supplier; The payment policy of the supplier; The historical relationship between the client and the supplier.

11 AGENDA 1. MODEFINANCE 2. OUTLINE 3. CUSTOMIZATION 1. THE MORE CREDIT LIMIT: WHY THE CUSTOMIZATION IS NEEDED? 2. THE MODEL 3. THE BENCHMARK 4. CONCLUSIONS 5. CREDIT EVOLVING OUR VIEWPOINT

12 Customization We decided to develop a tailor made credit limit model by starting from the MORE credit limit because it already takes into account the public information mentioned before. The MORE credit limit is heavily based on the creditworthiness of the subject but, according to Mr. yyy s suggestions, it has been further adjusted according to a scoring model that weighs negative signals coming out from ratios analysis

13 Customization But still the new defined credit limit doesn t take into account the private information that is: The importance of the client for the supplier; The payment policy of the supplier; The historical relationship between the client and the supplier. The availability of this info corresponds to the supplier position in the Pareto distribution

14 AGENDA 1. MODEFINANCE 2. OUTLINE 3. CUSTOMIZATION 1. THE MORE CREDIT LIMIT: WHY THE CUSTOMIZATION IS NEEDED? 2. THE MODEL 3. THE BENCHMARK 4. CONCLUSIONS 5. CREDIT EVOLVING OUR VIEWPOINT

15 Customization The model (private info) In order to adjust the limit according to the real importance of XXX in the Pareto distribution, we obtained from XXX the history of Sales and credit limits in the last 2 years (2012 and 2013). Our aim was to analyze the XXX portfolio in order to understand how to customize, according to their business needs, the MORE credit limit. We used the data to: 1. Study the relationship between XXX and its clients from the table of Dec The analysis clarified: 1. The importance as provider of XXX for its clients; 2. The importance of the different clients for XXX; 3. The policies of credit limit granting according to the relationship between XXX and its clients; 2. Benchmark the developed model by applying it to the second table (2013) and testing the results.

16 The model Importance analysis The importance of XXX as provider and the relative importance of the clients for XXX (Example): Two companies in the same sector, same country and similar credit risk: Company Name Turnover (2012) MORE Rating MORE credit limit XXX Sales XXX Credit limit AA B BB CCC In this example it is evident that the importance of XXX for the two clients it s totally different.

17 The model Policies The policies of credit limit granting according to the relationship between XXX and its clients (Example): Two companies in the same country (Poland) and same credit risk: Company Name Turnover (2012) MORE Rating MORE credit limit XXX Sales XXX Credit limit CC BB DD BB In this example it is evident how XXX gives more credit (+39%) to the second company even if the level of Sales is similar and the second company is smaller.

18 Annex The Box Plot Box plots are very useful data visualization tools for depicting a number of different summary statistics and especially for graphically comparing multiple data sets. 75 th PERCENTILE MEDIAN 25 th PERCENTILE On each box, the central mark is the median, the edges of the box are the 25th and 75th percentiles, the whiskers extend to the most extreme data points not considered outliers, and outliers are plotted individually EXTREME BUT NOT OUTLIER USA France Japan Germany Sweden Italy

19 The model His torical Credit limits VS Turnover

20 The model His torical (Credit limits / Sales ) VS Turnover 1 Client Credit Limit / Sales Turnover

21 The model His torical Credit limits VS Sales 0.8 Client Credit Limit / Sales Sales (th )

22 The model last insights It is clear, from the previous slides, Sales play an important role. So we decide to investigate the relationship between these two variables: 1. the importance of XXX defined as [Sales] / [client s Turnover] 2. the ratio between the limits: [MORE credit limit] / [XXX credit limit] The first variable has an influence on: a. The limit of credit b. The importance of the client for XXX and vice versa The second variable makes evident when and how to correct the MORE credit limit XXX

23 The models the power relationship From the interesting observation we obtained in our data mining analysis, we decided to implement some models to correct the MORE credit limit according to XXX s importance. The models (4 different models according to the level of sales) have the shape depicted in the following figure: y = a*x^b Correction Correction factor Client's importance Sales / Turnover

24 The models the power relationship The application of the power relationship formula grants at the same time many advantages: 1. The new limit takes into account the importance of XXX for the client; 2. The new limit, being a customization of the MORE limit, takes anyway into account the risk level of the client; 3. The new limit is in line with the past credit exposures of XXX.

25 AGENDA 1. MODEFINANCE 2. OUTLINE 3. CUSTOMIZATION 1. THE MORE CREDIT LIMIT: WHY THE CUSTOMIZATION IS NEEDED? 2. THE MODEL 3. THE BENCHMARK 4. CONCLUSIONS 5. CREDIT EVOLVING OUR VIEWPOINT

26 The models the benchmark Having developed the models on the data related to 2012 fiscal year, we have tested the results on the 2013 data. The analysis has been conducted on the following companies: Companies with Sales amount greater than credit limit; Rating higher than CC (for the classes CC,C and D we suggest zero limit). Whereas the average of the ratio MORE credit limit / XXX credit limit was 15,82 before the adjustment, the same ratio on the adjusted limit is 1,18. This means the credit limit is now in line with the XXX s business requirements.

27 The models the benchmark (th ) Annualized Sales Operating revenue (Turnover) Rating MORE Credit Limit XXX Credit limit New customized Credit Limit BBB BBB BBB CCC A BBB B B B B BB B B BBB A A

28 AGENDA 1. MODEFINANCE 2. OUTLINE 3. CUSTOMIZATION 1. THE MORE CREDIT LIMIT: WHY THE CUSTOMIZATION IS NEEDED? 2. THE MODEL 3. THE BENCHMARK 4. CONCLUSIONS 5. CREDIT EVOLVING OUR VIEWPOINT

29 Conclusions The customized credit limit used by XXX represents the state of the art in that respect because: 1. It takes into account the importance of XXX for the client; 2. Being a customization of the MORE credit limit, it takes into account the risk level of the client; 3. It is in line with the past credit exposure policies of the company;

30 AGENDA 1. MODEFINANCE 2. OUTLINE 3. CUSTOMIZATION 1. THE MORE CREDIT LIMIT: WHY THE CUSTOMIZATION IS NEEDED? 2. THE MODEL 3. THE BENCHMARK 4. CONCLUSIONS 5. CREDIT EVOLVING OUR VIEWPOINT

31 Which future for credit management?

32 Which future for credit management? Cooperation with the company main managers Insurance Credit manager

33 Il prossimo appuntamento con Bureau van Dijk Roma, 29 Maggio 2014: Strategie di internazionalizzazione per la crescita delle aziende italiane.

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