Capture Major Risk Trends with a Financial Analysis Model
Figliozzi, John P., Business Credit
Much has been written about the fundamental business restructuring underway in this country. Responding to new consumption patterns, merchants and manufacturers are working hard to reduce expenses and expand their markets in an effort to shore up eroding sales trends and margins. Commercial banks are faced with a similar dilemma in seeking out creditworthy customers. In this type of environment, the pressure falls on credit managers to approve increasingly liberal open account terms. The risks are compounded when this occurs in markets that are new to your company.
Approaching Risk Management Systematically
A systematic approach is needed, both to manage the load and to ensure some consistency and control in risk management. Some of the techniques originally developed in international banking can be successfully applied. Ideally, credit decisions are based on an in-depth evaluation of the prospective customer's business and financial situation. The old saying "know your customer" is as true internationally as it is here at home.
If you are fortunate enough to work in a company with a developed in-country presence in every market you wish to sell to, such a classical approach may be feasible. It is obviously expensive to develop and maintain the staff and resources for this, but if the value of the goods and services sold is large enough, it may actually be cost effective in terms of loss-risk management.
However, that approach probably works for very few people. What about the majority who lack this infrastructure, and whose sales volume does not justify the expense, especially if numerous markets are involved?
The answer lies in a financial analysis model designed to capture the major risk trends and issues. Of course, any evaluation model, even those which are statistically validated over a large sample of clients, will produce errors. The less rigorous research and development, the greater margin for error should be allowed.
Conceptually, the idea is to predefine the target markets within a selected country. Obviously, such an exercise must be done with the sales and marketing teams assuming a leading role.
Defining Target Markets
A target market definition will generally be codified into several sections. These will include a series of specifically targeted industries within a country; individual "business acceptance criteria" which include financial standards (taken from the financial statements of the proposed customers); non-financial standards (taken from publicly available information); and, transaction standards (which refer to individual transaction parameters considered acceptance under this approval system).
An example of how each section is developed may serve to illustrate this principle.
Say you are developing export sales of widgets to Asian markets. Your widgets range in price between $13,000 and $75,000, depending on the features. A standard order would consist of a shipment valued at approximately $1,000,000, and would normally be sold in this country on open account terms up to 30 days. Commercial lenders typically finance such an order on terms ranging up to one year.
Let's further assume that these widgets will appeal to electronics components manufacturers, and that you have discovered a market niche in Japan for your product. In-depth analysis of a potential buyer in Japan is probably not possible due to your inability to obtain complete information, differing accounting standards, lack of local industry and market knowledge, language differences, legal system differences, and others.
The information needed for the research into the electronics industry in Japan can be obtained from U.S. domestic sources such as universities, business consultant groups, money center financial institutions, the Department of Commerce, and other industry and trade associations involved in import and export trade or financing such as FCIB-NACM. …