Target Components – Open Day ‘Managing Credit Risk’ Steve Hamstead 16 th September 2011.

Target Components – Open Day

‘Managing Credit Risk’

Steve Hamstead

16th September 2011

Reynolds Trade Credit

• Established 1912

• Specialist Credit Insurance Broker (Domestic & Export)

• One of the largest Independents

• Full client support services

• Wide range of client industry sectors

• Speciality in Energy/Non Food Retail/IT trade sectors

Key Messages

• UK Corporate Insolvencies 2000 - 2010

• The Risk Assessment Process

• Sources of Information

• Credit Insurance – What is it? Why have it?

• Major Insurers

• The Future

UK Corporate Insolvencies 2000 – 2010

UK Insolvencies by volume Q3 2010

The Risk Assessment Process

• Information Sources

• Risk Assessment

• Customer Visits

• Identifying potential failures

Sources of Information

• Companies House• Management accounts• Trade journals• News releases and other press sources• Company websites• Customer meetings• Payment performance• CCJ’s• Director details• Rumours & relationships

Risk Assessment – Financial Statements

• Profit & Loss Account – ‘a summary of the trading year’

• Key figures: -– Profitability– Interest cover– Dividends

• Trends• Age of accounts

Risk Assessment – Financial Statements

• Balance sheet – ‘a snapshot of the strength of the business’

• Key assessment figures: -

– Tangible net worth

– Debt structure/gearing ratio

– Working capital/liquidity

• Trends in stock turn, debtor days & creditor days

• Age of accounts

Risk Assessment – Financial Statements

• Cash flow – ‘a summary of actual cash movements, not accounting rules’

• Key figures: -– Cash flow from operating activities– Net inflow/outflow after tax/interest obligations– Free cash flow – figure used by banks to assess

ability to repay debt

• Trend in figures• Age of accounts

Customer Visits

• Opportunity to obtain information and ask questions: - – Ownership– Management– Funding– Main clients– Suppliers– Future strategy

Warning Signs

• Weak management• Inadequate financial control• Lower profitability/losses• Slow payments• Fraud• Change in ownership• Track record• Late filing of accounts

What is credit insurance and why have it?

• Insolvency/Default• Export / Political Risk• Whole turnover• Principal Customer• Specific Account• Catastrophe

• Risk Transfer• Buyer Information• Pro-active

Management of risks• Improve/Standardise

Processes• Improve Bad Debt

provision/control

Major Insurers

• Traditional Market – Whole turnover

• 80% of market

• Euler Hermes (Allianz)

• Atradius (CyC)

• Coface (Bank Netaxis)

The Future???

Challenges continue……

• Fuel prices a major cause of inflation

• Government projects will run off – Public Sector is not a panacea

• Tough rent negotiations• Outdated business

models• Cautious consumers• Global downturn – if

exporting, where?

What can you do?

• Vigilant• Proactive• Processes• Controls• Minimise overdues• Consistent approach• Know your customers