Saturday, June 29, 2013

SME Assessments Apps



Sum2, a recognized leader in the development of commercial Sound Practice applications is pleased to announce it has initiated a app development program to address operational, risk assessment and opportunity discovery needs of SME's.

Our app development program will address three areas:

  • SME Risk Management
  • Anti-Money Laundering Compliance
  • Tax Risk Assessment
  • SME Credit Risk

We expect to publish our first apps within the next few weeks.

We appreciate your support and look forward to addressing your risk management needs.

Scan the QR Code above to access Sum2 digital assets app.

Or visit this link to learn more: sum2llc digital assets




Friday, June 21, 2013

Managing Macroeconomic Risks


Yesterday Ben Bernanke's statements about changing sentiment of the Federal Reserves' Quantitative Easing program touched off a mini stock market crash.  Though you took a solid hit in the value of your investment portfolio and retirement account the changing stance of the Fed will also impact the financial health and business conditions of small and mid-size businesses (SME). The days of near zero interest rates and the massive liquidity infusions by the Fed through Treasury purchase programs are coming to a close.  That will effect the availability and the cost of capital for SMEs. 

Macroeconomic risks are quickly becoming one of the greatest class of risk factors for SMEs. Credit availability, customer buying power, inflation, supply chain disruption, cyclical and market sector risks are growing in significance and threaten the profitability and financial health of all SMEs. Unfortunately, some businesses will not be able to surmount the acute challenges posed by these emerging economic risk factors and will find it difficult to continue as a going concern.

A difficult economy presents challenges for all businesses.  SME's require risk assessment tools to help better manage business threats and seize opportunities that fluctuating market conditions produce.  Many believe that mitigating macroeconomic risk factors are difficult if not impossible for SMEs to mitigate.  After all what can a small business do to immunize itself to inflation or spiking interest rates? Though it may seem to be an impossible task to shield a business from macroeconomic risks; executives that effectively engage to manage these type of threats Can profit from the opportunities severe market conditions produce.

Sum2's risk assessment products help SMEs deal with the problem of rising macroeconomic risk factors. Small business managers use our SPOT application to aggregate and score all enterprise risk factors.  This helps managers to focus on the most pressing risk factors that ironically have the potential to generate optimal returns on capital employed. 

Credit|Redi is a series of assessment applications that help SMEs improve the company's financial health.  As a company's credit rating improves, access to bank loans and other sources of capital become readily available at more favorable terms to the SME.  This is a particularly pressing problem as SME's have born the brunt of financial distress ignited by the Great Recession.  As interest rates rise SMEs borrowing costs will increase placing further stress on profitability and financial health.

It brings us great satisfaction to place world class risk management tools in the hands of small businesses to better manage business threats . The macroeconomic risk module is one of twenty risk assessment modules offered in SPOT.  

The effects of rising macroeconomic risk factors will begin to appear in an SME's operations and target markets potentially stressing the company's financial health.  SPOT potential problems and opportunities before they emerge.  SPOT and assess the current business conditions to make adjustments and initiate actions to overcome difficulties and seize opportunities the new business cycle is sure to present.


Risk: credit, inflation, market, buying power, customer risk, supply chain

Wednesday, June 12, 2013

Corporate Governance and Financial Health

16414033-abstract-word-cloud-for-corporate-governance-with-related-tags-and-termsThree years ago I did some work for an independent credit rating agency utilizing a quantitative methodology to determine financial health of corporations.  Dr. Patrick Caragata founder of Rapid Ratings conducted a study of 200 TSX listed firms with high Corporate Governance (CG) ratings according to Governance Metrics Inc.     He wanted to determine the correlation of CG and financial health.  His findings "CG ratings failed to indicate when a company was in poor health 75% of the time.  In fact, they wrongly identified 32% of weak companies as being strong."  Dr. Caragata also put together a study course for the Australian Institute for Company Directors.  He's a brilliant guy.  His firm was bought out by a private equity firm but you can still locate him at Rapid Ratings.

Caragata also extended his model to use financial health score as an early warning signal for a listed company's share price.  KMV, established ratings agencies, Altman's Z Score were also determined as lagging predictors of share price.  Caragata's research on bond pricing and CDS where better predictors of financial health momentum and ultimate predictors of share price but still failed to correlate financial health score as an early warning signal for share prices.  The problem that the model continually encountered was that valuation always exhibited a bias towards share price not financial health score.  The determination of a “fair value” based on historical spreads of financial health score and share price was overly and overtly price sensitive.  This was particularly true for bubble stock anomalies and commodity sensitive equities.

Purveyors of Business Process Management (BPM) suggest that listed practitioner’s of BPM trade at a 15% premium to non-practitioners.  I think it more marketing boast.  Though BPM is not CG;  it does speak to having CG excellence in the corporate DNA.   That’s what our firm is about.  Sound practices create valuation premiums and sustainable business models.  That’s the message we consistently deliver as central to our value proposition.  Integrating sound practices, BPM and CG excellence into the corporate culture does create valuation premiums because it suggests an intentionality of business process deeply wedded to enterprise mission.

I believe the radical reconfiguration of Wall Street offers a telling example of incongruity of good CG practitioners and financial health.  It was always a self evident truth that Wall Street firms that folded or transformed into commercial banks were probably some of the best rated CG enterprises.  CG excellence can do nothing to save an enterprise with a structurally flawed business model.  Though CG excellence does presuppose a board of directors in tune with the vicissitudes of the market; who would have thought that we would be looking at the extinction of global investment banking business?  Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns and the mighty Goldman Sachs were walking dinosaurs with flawed unsustainable business models.  I still can’t believe it but it’s true.  The world is being turned upside down.

Sum2 is a firm believer in coupling quantitative and qualitative risk measures to maintain operational excellence to build a healthy sustainable enterprise.  Effective CG alone cannot assure financial health.  It  must be a critical pillar of the governance, risk and compliance (GRC) triad.

When we speak about the principles of good governance, how about the original dissertation on the ideal of governance excellence.  Seemingly an insistence on an honest evaluation of reality to determine what is good is all it takes.  Its really that simple.

Visit the blog Risk Rap and the Allegory of the Cave post on FAS 157:

Sum2 welcomes the opportunity to speak with partners who share our passion for GRC excellence.

Full disclosure, I have no commercial connection to Rapid Ratings.

Tuesday, June 11, 2013

Measuring SME Credit Risk




The underlying financial health of Small Mid-Size Enterprises (SME) has always been difficult to determine, hard to identify and its never been more important.

To manage risk in the credit and capital markets it is critical for lenders and credit suppliers to understand the relative financial health of counter-parties, customers and suppliers. Effective credit extension decisions cannot be made without superior analysis generated by forward-looking, unbiased tools.

The credit crisis and recession has devastated small and mid-sized businesses. Getting a bank loan or securing capital from investors is a big challenge for small businesses. Banks have become extremely cautious in lending to small businesses. To be successful in securing credit you'll have to demonstrate that you are a good credit risk, that your company's prospects for growth are strong and that your business model is sound.


Why Credit Score is important?

The quality of your credit rating and financial health form the basis for decisions other businesses make about you. Managing your business to improve your Credit Score will improve your company's financial health. A strong Credit Score indicates good financial health and is used by lenders, capital providers, customers and suppliers to determine:
  • How much business credit a supplier will extend to you
  • What interest rates you will pay
  • How much money lending institutions will loan you
  • How your customers view you
  • What your insurance premiums will be
  • The level of potential investor interest

Sum2 utilizes Altman's Z Score method to determine fundamental financial health ratings.  The Z Score credit rating is valid measure of financial health for any public or privately held corporation. The Z Score rating methodology is a proven credit risk indicator that is widely used by banks, investment managers, Fortune 1000 companies and small to medium sized enterprises to determine and manage risk. Sum2's clients use the Z Score rating products to determine financial health, remain in compliance with loan covenants, and assess credit worthiness of clients and mission critical suppliers.

Altman's Z score method examines fundamental financial data derived from a company's balance sheet and income statements.  A credit rating is generated by the use of ratio analysis that yields valid comparative results regardless of the currency utilized. Working capital, earnings, reinvested earnings and leverage are integrated into a composite credit rating score. The components and standards are similar to those used by traditional lenders. It is an easily understood approach that provides comprehensive financial details not available with the standard agency reports. 

Click here to access Sum2's Z Score Input Template.

Click here to access zip file of sample reports. Palm Corp Z Score Report.

We recommend supplementing the analysis with trade reports from firms like the Credit Management Association (CMA) or Experian and others for their pertinent data and services.

Businesses that extend credit can determine cutoff scores needed to qualify for credit as their risk tolerance and economic conditions change. Lower scores and classifications indicate higher probabilities of default.
Credit ratings must include a careful analysis of the income statement, balance sheet, changes in financial position and key metrics along with consideration of trends, economic conditions and other available data.

Credit|Redi is a set of business assessment tools that helps businesses determine credit worthiness.  It is a critical business tool SME's need to incorporate to better manage and assess credit risk.

More information on how to manage credit risk can be found here: Credit|Redi