SME Lending: Get Redi to Get Funded

The tough conditions in the credit markets require small businesses to communicate and demonstrate their credit worthiness to satisfy exacting credit risk standards of lenders. Credit channels are open and loans are being made but strict federal regulations and heightened risk aversion by lenders places additional burdens on borrowers to demonstrate they are a good credit risk.

“You have to be prepared,” said Robert Seiwert, a senior vice president with the American Bankers Association. “If you have a viable business model and the banker feels that this business model is going to work in this new economy, you have a very good chance of getting financing. But you have to be ready to show that it will work.”

"Small and medium-sized businesses are the lifeblood of the U.S. economy.  Their ability to prosper and grow is key to job creation to help our nation recover from the economic slowdown. But with the number of bad loans mushrooming in recent years because of the economic downturn, federal regulators have put in more stringent guidelines for qualifying for financing.", stated Ken Lewis former CEO of Bank of America.

Communication with Lenders is Key

Maintaining an open line of communication with your credit providers is key.  During times of prosperity the lines of communication are open; but during times when businesses face adversity the phone stops ringing and lenders start to get nervous.  When business conditions get difficult businesses need to communicate with greater frequency and openness with their lenders.  Bankers don't like surprises.

Reason to Communicate: Risk Assessment

The entrepreneurial nature of small business owners make them natural risk takers.  They have an unshakable belief in the fail safe nature of their ideas and have strong ego identification with their business.  This often makes them blind to the risks lingering within the business enterprise.  Their innate optimism may also cloud an ability to objectively analyze business risks and prevent them from seizing opportunities as a result of poor assessment capabilities.

Conducting a disciplined business assessment will uncover the risks and opportunities present in the enterprise and in the markets that the business serves.  This risk assessment is a great opportunity to communicate to lenders and credit providers that business management are capable risk managers and are a worthy credit risk.  Lenders will be impressed by the transparency of your risk governance practice and will be more disposed to provide financing for projects and opportunities that will propel future growth.

Banks are looking for businesses that are prepared with their financial and business plans. Business owners must present a clear purpose for the loan tied to clearly defined business objectives.   The risk assessment exercise is a vital tool that assists in the construction of a business plan that builds  lender's confidence in your business.  The assessment will reveal the largest risk factors confronting your business and outline clearly defined opportunities that promises optimal returns on loan capital.

Its music to a bankers ears that clients are managing risk well and have identified the most promising opportunities  for business investments.  It is usually a recipe for success and that will allow you and your banker to develop a trusted business relationship based on honesty and transparency.

Get Credit|Redi

Sum2 offers a portfolio of risk assessment applications and consultative services to businesses, governments and non-profit organizations. Our leading product Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to manage enterprise risk and attract capital to fund initiatives to achieve business goals. Credit Redi helps SMEs improve credit standing to demonstrate creditworthiness to bankers and investors. On Google Play: Get Credit|Redi

Get Credit|Redi

Risk, SME, commercial lending, alternative credit channels, credit risk, community banking, small business lending, business plan, capital raise, risk assessment

The Cost of Reputation Risk

I came across a great presentation on Reputation Risk from Martin Davies of Causal Capital. It outlined the many dimensions of this onerous corporate threat. It offered a definition, a list of risk factors, its impact on a company’s financial condition and proposed frameworks to mitigate its effects.

In the pantheon of risk factors, reputational risk is the classic riddle wrapped in a mystery. Its obtuse nature is due in part because it can spring from a multitude of internal and external factors. This makes predicting the occurrence of a reputational risk event difficult to assess and near impossible to quantify making ROI mitigation funding decisions a perplexing task. 

Reputation risk seems to loom as a phantom menace that inhabits the dismal swamp of innumerable asymmetric risk factors. Its appearance is rare but potentially catastrophic in nature because it strikes at the heart of brand value and corporate integrity. 

The dissolution of Arthur Andersen due to its failures to detect fraudulent business and accounting practices at Waste Management, Worldcom and Enron destroyed the firms reputation for honesty and integrity. Though some argue the cause of this spectacular corporate collapse was due to the contradictions of an attestation/consultancy business model, AA’s pattern of high profile failures in its attestation business made it impossible to continue in business as a firm with unimpeachable standards for audit and accountancy excellence. 

Though corporate dissolution is the worst case scenario resulting from a catastrophic reputational risk event, larger firms with the financial wherewithal and organizational resource to underwrite corporate resilience strategies are best positioned to overcome the severe shocks of a reputation risk event. Mitigation initiatives must be more than a PR exercise in damage control. Senior management must take ownership of the event and implement a strategy that allocates resources to the problem to assure stakeholders that an optimal return on capital employed will be realized to the benefit of a sustainable enterprise.

Though reputational risk seems to arise from a kismet of asymmetrical factors, which are difficult to foresee and nearly impossible to plan for due to the limitations of linear causation and factor biases of quantitative based risk models; reputational risk is best addressed by striving for GRC (governance, risk compliance) excellence throughout the corporate enterprise.

This is particularly important for SME’s who lack an expansive balance sheet, financial reserves and organizational resources to ride out and overcome the profound impact of a reputational risk event.

Quantification of reputation risk is difficult to measure. The cost of mitigation initiatives and the expected loss realized from a reputational risk event must be funded through the GRC culture of the enterprise. The above slide caught my attention because it graphically displays the impact of a reputational risk event on the equity value of a publically traded company. Though equity exchanges are good barometers to determine monetary impact of a risk event, the managers of privately owned firms are beholden to a different set of expectations of closely held corporate stakeholders. 

Amorphous performance standards of idiosyncratic investors, the close coupling of corporate goodwill, shareholder identification, corporate identity and product branding concentrates and magnifies the intensity of reputation risk. 

SMEs mitigate reputational risk factors by developing a vigilant GRC culture that encourages the engagement of all employees in the mission of the enterprise. In so doing, all company stakeholders are deputized as vigilant risk managers; all wholly invested in the protection of corporate goodwill and the creation of long term sustainable value of an extended enterprise. 

Sum2 believe this to be the case as well. Our clients engage risk as a daily cost of doing business. We design risk management products for small business managers that empower them to lower the odds and consequences of damaging risk events while positioning themselves to be the beneficiaries of opportunities changing market conditions produce. 

Get risk aware and protect your business with the S3 an SME Seismograph, a risk detector and an early warning and opportunity discovery app on Google Play. 

* 

Get Risk Aware

Risk: reputation, Arthur Andersen, sme, macro, catastrophic, Black Swans, facilities, business interruption, transportation, contagion risk, infrastructure risk, S3, GRC, Martin Davies, Causal Capital

ADP Employment Report: Job Creation Marches On

Private-sector employment increased by 191,000 during the month of March, according to the latest ADP National Employment Report (NER) released yesterday. The NER suggests a steady, albeit uneven growth of nonfarm private employment since net job creation first turned positive during the first quarter of 2010. The pattern of rising employment gains, confirms signs of an accelerated economic recovery reinforced by a March report that is above the 12 month average. 

Though the report is an indicator of continued recovery, job growth forecasts for the month were closer to 205,000. As fears of a jobless recovery recede, the US economy has a long way to go before pre-recession employment levels are achieved. Full employment requires the economy to create over 200,000 jobs per month for 48 consecutive months to achieve pre-recession employment levels. The monthly average is well below that level; even though the unemployment rate has been trimmed to 6.6%. 

The March report is encouraging because it points to an accelerating pace of job creation. The post Christmas season employment surge represents a 70,000 job gain over January's anemic numbers. The service sector accounted for over 164,000 of the job gains. The manufacturing and goods producing sector combined to create 28,000 jobs. Construction offered confirmation of a tepid recovery in the housing market adding 20,000 jobs during the month. The construction industry has lost over 2.1 million jobs since its peak in 2008. 

The report also indicated that the five selected industry groups all reported positive job growth for the second consecutive month. The professional/business service sector was the strongest performer adding 54,000 jobs, followed by trade/transportation/utilities with 36,000 and financial services and manufacturing each adding 5,000 jobs. Job creation is welcomed for all sectors of the economy but sustainable economic growth can only be achieved by a robust turnaround in the goods producing and manufacturing sectors. Service sector jobs offer lower wages, tend to be highly correlated to retail consumer spending and positions are often transient in nature. Small and Mid-Sized Enterprises (SME) is where the highest concentration of service jobs are created and the employment figures bear that out with SMEs accounting for over 124,00 jobs created in March. 

Large businesses added 67,000 jobs during the month. The balance sheets of large corporations are strong. The great recession provided large corporates an opportunity to rationalize their business franchise with layoffs, consolidations and prudent cost management. Benign inflation, global market presence, favorable tax codes, outsourcing, low cost of capital and strong equity markets created ideal conditions for profitability and an improved capital structure. The balance sheets of large corporations continue to exceed $1 trillion in cash and it appears that large businesses are beginning to deploy this capital into job creating initiatives. 

The restructuring of the economy continues. The Federal Reserve Quantitative Easing program is ratcheting down. The capitalization of banks has grown considerably stronger with fewer bank failures and only Citibank failing the last round of FDIC stress testing. Most believe this will free more capital for loans to SMEs. This coupled with the emergence and development of nascent alternative credit channels bodes well for future job creation. 

Macroeconomic Factors: 

The principal macroeconomic factors confronting the economy are the continued widening of the wealth gap and the creation of low paying jobs. The unemployment rate continues to decline and signs of a recovering housing market are encouraging. Tax policy, fiscal stability of state and local governments and the underfunding of deteriorating civic infrastructure continue to vex economic recovery strategies. 

In the United States, as the 2014 election cycle proceeds, acute partisanship will undermine the political will to address recovery initiatives with legislative action. The Affordable Health Care Act (AHCA) is being implemented against a backdrop of continued partisan strife. The AHCA should drive long term economies in public health care. The goal of seven million program enrollments was achieved by the March 31 deadline. Enrollment levels confirms the pent up market demand for affordable health care. Going forward a nagging concern of the AHCA is the quality of the experience pool of enrollees and the consistent payment of monthly insurance premiums to fund the program. The complex rules for business participation in the program creates a level of uncertainty of how the AHCA will affect SMEs. 

Globally, political uncertainty in Eurasia is an emerging risk particularly for the European Community which is just beginning to emerge from its recession. The cooling of the BRICS as global economic drivers seems to have run its course as is the case with all commodity sensitive business cycles. China's GDP growth is expected to be 7%. This predicted modest growth will tamp down China's role as a principal driver of global growth. 

The volatility of global energy markets remain susceptible to the political stability of OPEC. Political instability in Venezuela and the disintermediation of Russian oil and natural gas supply to the EC may encourage the acceleration of NG , shale oil extraction and refining in North America. 

The Intergovernmental Panel on Climate Change (IPCC) has recently issued a report. The panel indicated that evidence is pointing to accelerated rates of climate change. Though climate change poses significant risk to political stability and economic growth, it also offers opportunities for governments, businesses and communities to engage in mitigation and adaptation initiatives with positive economic benefits. 

Political uncertainty tends to heighten risk aversion in credit markets. The emergence of the US and EC from the distress of the Great Recession and Global Credit Crisis has improved the conditions of global credit markets. Bank stabilization has grown opportunities for increase commercial lending to SMEs. The development of alternative credit channels like crowd funding, micro lending, asset financing is developing to the benefit of the global SME sector. 

Highlights of the ADP Report for March include: 

Private sector employment increased by 191,000 

Employment in the service-providing sector rose 164 ,000 

Employment in the goods-producing sector increased 28,000 

Employment in the manufacturing sector increased 5,000 

Construction employment increase 5,000 

Large businesses with 500 or more workers increased 67,000 

Medium-size businesses, between 50 and 499 workers increased 52,000 

Employment among small businesses less than 50 workers, increased 72,000 

Overview of Numbers: 

The 72,000 jobs created by the SME sectors represents over 65% of new job creation. Large businesses comprise approximately 20% of private sector employment and continues to underperform SMEs in post recession job creation. The strong growth of service sector though welcomed continues to mask the underperformance of the manufacturing sector. The 11 million manufacturing jobs comprise approximately 10% of the private sector US workforce. The 5 thousand jobs created during March accounted for 2.5% of new jobs. Considering the severely distressed condition and capacity utilization of the sector and the favorable conditions for export markets and cost of capital, the job growth of the sector appears extremely weak. The US economy is still in search of a driver. 

The stock market continues to perform well. The Fed taper of QE2 initiative seems to signal a change in fiscal policy principally focused on the troubling dynamics of inflation/deflationary pressures. The IMF forecasts a 2.8% GDP growth rate for the US. 

Interest rates have been at historic lows for four years and despite the QE2 taper adverse conditions in the credit market appear to be benign. The political crisis in the EU has settled down but the long term stability of the currency and European Federation are under severe attack by growing nationalist movements across the continent. 

As the price of agricultural commodities, water rights and food staples continue to trend upward The balance sheets of large corporate entities remain strong. The availability of distressed assets and market volatility has eased. Venture capital and private equity capital formation continues to drive premium asset valuations in numerous tech sectors encouraging business start ups and global entrepreneurship. 

Solutions from Sum2 

Sum2 offers a portfolio of risk assessment applications and consultative services to businesses, governments and non-profit organizations. Our leading product Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to manage enterprise risk and attract capital to fund initiatives to achieve business goals. Credit Redi helps SMEs improve credit standing to demonstrate creditworthiness to bankers and investors. On Google Play: Get Credit|Redi

Get Credit|Redi

Risk: unemployment, SME, China, EU, small business, QE, Federal Reserve, Citibank, stress testing, manufacturing, BRICS, fracking, inflation, service sector, micro lending, AHCA, Obamacare

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

PwC Risk in Review 2014 Survey

Pricewaterhouse Coopers (PwC) has published its annual Risk in Review survey. Nearly two thousand global corporate professionals representing a broad cross section of industries responded to provide insights into how their organizations meet the challenges of enterprise risk management.

The study was published against the backdrop of an emerging Eurozone recovery, US Sequester driven GDP decline, BRICS vacating the leadership role of global market drivers, the factory collapse in Bangladesh, the political turmoil of the implementation of the Affordable Care Act and Eric Snowden’s revelations of NSA privacy violations. 

The previous year survey reflected the perspective of corporate managers still smarting from the economic effects of the Great Recession and global credit crisis; by anointing financial distress and market uncertainty as the principal driver of corporate threats. This years survey cited technological change, IT risks, regulatory complexity and rapidly changing customer needs as the primary focus of corporate risk management programs.

The survey examined the intimate relation of external risk factors and how the organization has aligned its internal GRC processes to address both external and internal risk drivers. The survey identified the ten most common risk management capability gaps. It also offered an evaluative framework to distinguish corporate risk leaders, early stage adopters and organizations beginning to develop a more formalized risk aware culture. 

The survey is an excellent examination of the components of a risk aware enterprise and a proposed framework to develop a risk aware culture within a commercial enterprise. The survey can be downloaded from the PwC website. 

In future posts we will examine some of the major points the survey raises to promote a more risk aware corporate culture.

Sum2 publishes a series of risk management apps for SME’s. Our leading product Credit|Redi provides a full complement of risk assessment tools to implement a risk aware corporate culture. Credit|Redi generates in-depth financial analysis reports that spot strengths and weaknesses in a company's financial condition. Credit|Redi also provides a series of enterprise assessment applications to monitor risk and determine opportunities for business growth to build a risk aware enterprise that wins the confidence of lenders and stakeholders.

Get Risk Aware on Google Play here. Get Credit|Redi

Get Risk Aware

Risk: GRC, PwC Risk in Review, SME, risk culture, ERM, IT, customer risk, capability gap, risk appetite, change management, stakeholder communication, regulatory risk 

A Taxing Problem: Digital Assets and Global E-Commerce

The Independent reports that Ireland's Chartered Accountants are warning that "new OECD proposals on taxing hi-tech multinational companies will fundamentally change business landscape." 

The OECD has published a draft discussion on companies operating in the digital economy.  The question of determining tax liability for companies with a business model spanning multiple countries is a growing concern for national tax agencies. Outsourcing, offshoring, the use of tax havens and global e-commerce are perplexing tax authorities seeking to enforce outdated national tax codes written before the explosion of the global digital economy. 

The report proposed redefining when and where a company is liable for tax; suggesting a company would have a tax liability in a country where it had a "significant digital presence".

Ireland is particularly sensitive to this issue in wake of it's recent tax dispute with Apple and other multinationals with operations in the tax friendly EU nation.

Revenue recognition in a rapidly changing global economy with a growing preponderance of digital assets, intellectual capital and digital specie like Bitcoin raise important questions for corporate managers, tax authorities and regulators. Defining revenue, asset types and national jurisdictions of taxing authorities pose great challenges for tax professionals, corporate management, legislators and revenue agencies. Leveraging global disparities in national tax laws to arbitrage local tax codes is the mark of shrewd treasury management. It can also raise questions with tax agencies.

SME's involved in global digital e-commerce must become aware how the evolving tax code opens the door to tax controversy that rises audit risk factors from national revenue agencies.

Sum2 developed the IRS Audit Risk Program (IARP) to provide SME’s an audit risk assessment tool to keep the taxman away from the door. IARP outlines tax code focus areas where caution should be exercised when filing tax returns. Business owners can rest a bit more easy that audit risk is being effectively managed. Get Tax Audit Aware with IARP.

Get Tax Aware

Risk Bitcoin, CPA, digital assets, e-commerce, EU, global economy, IARP, income repatriation, Irish Independent, IRS, multinational, OECD, off-shoring, outsourcing, revenue recognition, risk: tax, sme

QE Taper Risks Spike in Global Interest Rates

Forbes Reports:

3/17/14

"...The Federal Open Market Committee (FOMC) expects the taper of the Quantitative Easing to continue. Economists expect the Federal Reserve to cut another $10 billion from its monthly asset-purchase program at its two-day monetary-policy meeting, lowering its monthly bond buys to $55 billion.

The FMOC meets Tuesday and Wednesday, and it will be the first one overseen by new Fed Chair Janet Yellen. Bond traders will focus on the commentary that accompanies the decision, which is slated to be released Wednesday afternoon. Additionally, during this meeting, the Fed will release its new economic forecasts..."

The Feds reduction in asset purchases, (primarily mortgage backed securities from banks and market makers) reduces market liquidity and cheap source of funding for banks. The goal of the Fed's QE has been to buttress the capital structure of banks to assure liquidity in credit markets. The QE program has been successful in maintaining low interest rates. This has benefited SMEs by keeping the cost of capital low and credit channels open.

Low interest rates have helped SMEs to borrow cheap money. Low interest rates have also benefited consumers by keeping borrowing rates for mortgages, car loans and credit cards low. This has stimulated market demand for SME products and services. QE has been a major market support for SMEs as the post Great Recession global economy continues to restructure. 

SME's must assess how QE tapering will affect their capital structure, business model and client purchasing power. It's critical for SME's to assess how these subtle changes in the market landscape will impact numerous aspects of the business.

Credit|Redi is a critical tool used by SME managers to determine financial health, assess business factors to improve profitability and demonstrate creditworthiness to lenders to fund business growth.

Download Credit|Redi on Google Play here. Get Credit|Redi

Risk: credit risk, sme, FOMC, interest rate, cost of capital, QE, Quantitative Easing, FOMC, Fed, Federal Reserve, Great Recession, Janet Yellen, Forbes

May Luck Be With You

It is said all the time.  May you have good luck in your new endeavor.  We realize its just an expression of goodwill but it does speak to the power and predominance of the notion of luck. Its as if the fates of chance and the charm of serendipity is the ultimate factor separating success from failure.  

This is absolutely the case for manufacturers of rabbit foot good luck charms, shaleigh wielding Leprechauns and other providers of magic elixirs and mojos that steer the gods of fate to your personal benefit.   But for the rest of us luck is a fickle thing whose appearance and consequence remains a riddle, wrapped in a mystery, inside an enigma.  

No question luck plays a big role in our lives.  The randomness of life can serve up pots of gold or oceans of despair due to minute measurements of time and space.  Consider missing a plane flight that crashed or consider the luck of someone who is shot in the chest and the bullet misses their heart by a few millimeters.  

These life altering random events are chalked up to the luck of the draw and we remain grateful that luck was on our side; yet remain a bit spooked had the circumstances gone the other way.

Though luck plays a factor in our lives and business careers, it is best to position oneself to be the beneficiary of luck when the angels of fortune flutter through the pathways of our life.

Alexander Hamilton said the spoils of fortune belong to the intrepid.  His sound advice counseling the need to engage calculated risk will more often than not result in some sort of achievement.

We at Sum2 believe this to be the case as well.  Our clients engage risk as a daily cost of doing business. We design risk management products for small business managers that empower them to lower the odds and consequences of damaging risk events while positioning themselves to be the beneficiaries of opportunity when the angels of luck flutter on by.

Happy St. Patrick's Day to all and may the luck of the Irish always be with you.

Generate some good luck for yourself by downloading the S3 a risk management tool for SMEs.

Get risk aware with our just released S3: SME Risk Seismograph, an early warning and opportunity discovery app on Google Play.

Get S3 on Google Play

risk: sme, random event, Black Swans, risk management

Small Firms Missing Out on Funding Opportunities

The Liverpool Echo reports today that a Lloyds Bank study of North West small firms, many SMEs are qualified for loans but problems with managing large outstanding receivables damages the company credit profile.

Lloyds' recent report on SME market segment uncovered some startling creditworthiness indicators. The report reveals:

... More than half the North West’s small firms (54%) are confident about investing for growth this year – but many are sitting on untapped assets and are owed thousands in unpaid bills…

...the average North West small company has £223,000 of assets, but is owed £56,000 in unpaid invoices…

...The UK as a whole has a total of £770bn of untapped assets in small firms – equal to 48% of the UK’s GDP – while they are owed a total of around £291bn by customers…

Lloyds believes many firms are ignoring alternative funding options to help them expand and grow. Clare Boswell, area director of Lloyds Bank Commercial Finance in the North of England, said: “Our research found that more than half of SMEs (small- to medium-sized enterprises) in the North West are more confident about investing in growth this year than they were 12 months ago.

“Despite this, SMEs are missing out on the opportunity to recruit new staff, break into new markets or develop new products because they are not harnessing the full range of funding options available that could unlock the value in their assets or invoices to help them grow.

“As a result, businesses are turning down contracts that they think they cannot afford to fund and are holding back their own growth potential.”  

SME's need to better assert convictions to move forward with growth plans and the confidence to approach lenders and capital providers to fund business growth.

Credit|Redi is a critical tool used by SME's to improve financial health and demonstrate creditworthiness to lenders and capital providers.

Get Credit|Redi on Google Play here.    Get Credit|Redi 

Get Credit|Redi

Risk: credit, market, opportunity, sme

Small Business Credit Index Improves

The Experian Moody's Analytics Small Business Credit Index has posted its forth consecutive quarterly improvement.

"The Experian/Moody’s Analytics Small Business Credit Index rose 1.2 points to 117 due to the growth of small-business credit balances. According to the Q4 2013 report, the increase marked the fourth consecutive quarter of improvement in small-business credit conditions and provided the highest index reading since data tracking began in 2011.

"Credit is flowing more freely to small businesses," said Mark Zandi, chief economist at Moody’s Analytics. "With more credit, small businesses are increasingly able to expand their operations. This means more investment and jobs, and a stronger economy."

Findings from the report indicated that the growth in credit balances was due in part to financial institutions loosening credit terms for small businesses, as well as an increase in business-to-business credit transactions."

The index is a positive indication that the economic recovery from the Great Recession continues. SME's are principle drivers of economic growth.  SMEs are the leading sector in job creation and, innovation.  Each requiring access to capital to fund business growth.  

The improvement of the credit index is a positive indicator for the continued recovery of the financial health of the SME sector.  

SME's were especially hard hit during the Great Recession.  The need for capital to fund growth and access to expanded credit facilities remain a pressing concern for the SME sector.

Credit|Redi is a critical tool used by SME's to improve financial health and demonstrate creditworthiness to lenders and capital providers.

Download Credit|Redi on Google Play here. Get Credit|Redi

Risk: credit, market, financial health

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.

Sum2 Risk Assessment Applications

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

SMEs Still Starved for Credit

 

Greenwich Associates highly regarded Market Pulse Study on SME credit availability reports that two-thirds of small businesses and 55% of middle  market companies indicate that banks are failing to meet the needs of creditworthy  companies.  Half of the 221 small businesses participating in the latest  Greenwich  Market Pulse Study say it is harder to secure credit today than it  was at  this time last year including roughly 33% of businesses that  say it  is much harder to obtain loans today.

The Small Business Lending Fund (SBLF) a $30 billion program established by the Treasury Department to encourage Community Banks to step up lending to SMEs is still trying to get some traction in the marketplace.  The SBLF injects capital into community banks that demonstrate an active SME lending  program will take another quarter to determine its effectiveness.

Community Banks are still transitioning its small business lending focus from an over dependency on real estate development.  SMEs seeking loans for capital improvements, fund operations or business expansion must provide lenders some added assurances about the financial health of the business.

SMEs can take steps to improve their credit standing and get approvals from lenders for loans and expansion for credit.  SMEs must demonstrate they have an excellent understanding of the condition of their firm's financial health, what they must do to improve profitability and how they will use the credit extended by lenders to produce an acceptable return.

Credit Redi helps SME's demonstrate the condition of the firms financial health, the risks and opportunities that SMEs must address to improve the firms financial health and identify the initiatives that need to be  funded to achieve desired profitability and growth.  These are the keys bankers look for on applications for loans.  Being able to demonstrate credit worthiness with an industry standard rating methodology determines weather a lender will grant you a loan, what rates you will pay and how much lending institutions will lend.

Since 2002, Sum2 has been helping SME's manage risk and seize opportunities to grow and prosper under the most competitive market conditions.  Credit Redit is the latest addition to Sum2's series of SME risk management products.

To determine the condition of your company's financial health click Credit Redi: 

Risk: credit, SME, capital allocation, credit rating

Credit Redi, Helps Spot Small Business Credit Risk

The recession and credit crunch have shifted financial risk from banks to small and midsized businesses (SME) that often must extend credit to customers to make a sale. When companies extend credit, in effect making unsecured loans, they're acting like banks but without the credit management tools and experience of a banker.

Credit Redi is designed for small businesses to quickly spot customer credit risk. Small businesses typically don't have access to information that provides transparency about customer credit worthiness. Credit Redi is a credit risk management tool for small and mid-sized businesses. It only takes one or two bad receivables to damage an SME's financial health. Market conditions quickly change and its critical to have some type of business insight into the businesses SME's work with.

Credit Redi is also an excellent tool to determine the financial health of critical suppliers. A key supplier going out of business could have disastrous consequences for SMEs. Credit Redi monitors the financial health of existing suppliers and help managers make wiser choices in supply chain and business partner decisions.

Get Credit Redi here:

Risk: SME, credit risk, supply chain, partnerships, customers, receivables

Job Creation Proceeds at Turtle Pace

Slow and steady may win the race but the pace of job creation by the US economy continues to move along at turtle speed. For the 20 million unemployed and underemployed people the pace of job creation remains painfully slow as revealed by ADP 's National Employment Report for October. During the month, private sector employment increased by 43,000 on a seasonally adjusted basis. ADP also revised its employment report for September stating that the economy lost only 2,000 jobs rather then the 39,000 it had previously reported. After an upward revision of 37,000 less jobs lost during September, during the past 60 days the private sector has produced 41,000 new jobs. For the worlds leading economy with a GDP of almost $15 trillion the lackluster growth in job creation is a troubling indicator of an anemic jobless economic recovery.

The October report arrests the September decline in job growth that reversed seven consecutive months of positive job creation. During that time the economy averaged employment gains of 34,000 new private sector jobs per month. This rate of job creation does little to reduce the negative overhang a 10% unemployment rate is having on economic growth. A stabilized and expanding labor market is a key ingredient for a sustained economic recovery. Over the past three years the economy lost over 9 million jobs. For a robust recovery to occur the economy needs to create 200,000 jobs per month for the next four years to return the job market to its pre-recession levels.

As we reported last month the expiration of the Federal stimulus program will force state and local governments to layoff workers. Sluggish job creation continues to pressure depleted unemployment funds and the expiration of benefits for many of the unemployed is draining buying power from the economy.

Soft consumer demand threatens retailers and leisure industry segments and has a spillover effect on the housing market. Joblessness is a principal factor in mortgage defaults and contributes to the growing inventory of foreclosed properties held by banks. The ADP report indicates that during October the US economy shed an additional 23,000 construction jobs. It is estimated that it will take 24 months for the housing market to absorb the existing inventory of foreclosed properties. A healthy turnaround in the construction industry will move in step with the improvement in the housing market conditions.

A sustained recovery will require sector leadership by Small and Mid-Size Enterprises (SME) as principal drivers of job creation. SME's sector strength has traditionally been in the construction, specialty retail, leisure and service sectors. Among these segments only the services sector continues to be a consistent driver for job creation.

Macroeconomic Factors

The principal macroeconomic factors impairing recovery are the continued high unemployment rate, weakness in the housing market, tax policy and deepening fiscal crisis of state, local and federal governments. The results of this weeks mid-term election and the return of congress to Republican control will encourage the federal government to pursue fiscally conservative policies that will dramatically cut spending and taxes for the small businesses and the middle class. In the short term spending cuts in federal programs will result in layoffs and cuts in entitlement programs will remove purchasing power from the demand side of the market. It is believed that the tax cuts to businesses will provide the necessary incentive for SME's to invest capital surpluses back into the company to stimulate job creation.

Highlights of the ADP Report for October include:

Private sector employment increased by 43,000

Employment in the service-providing sector rose 77,000

Employment in the goods-producing sector declined 34,000

Employment in the manufacturing sector declined 12,000

Construction employment declined 23,000

Large businesses with 500 or more workers declined 2,000

Medium-size businesses, defined as those with between 50 and 499 workers increased 24,000

Employment among small-size businesses with fewer than 50 workers, increased 21,000

Overview of Numbers

The 45,000 jobs created by the SME sectors reverses a decline from September and offsets the 2,000 job cuts by large companies. The strong growth of service sector jobs is a positive development. However the continued softness of goods producing segments and manufacturing continues to indicate the continued decline of US industrial capacity. The strong rebound in services may be the result of the expanding practice of companies utilizing outside contractors to fill human capital requirements. These types of jobs may mask an underemployed and transient labor pool forced to accept work at lower wage scales.

The stock market continues to perform well. Yesterdays announcement by the Fed to pump $600 billion into the banking system may allay bankers credit risk concerns and ease lending restrictions to capital starved SME's. Despite a projected GDP growth rate of 2%, ADP's employment figures indicates that the economy continues to dwell at the bottom of an extreme down economic cycle. The danger of a double dip recession still lurks as a possibility but is becoming more of a remote possibility. Interest rates remain at historic lows and inflation continues to be benign but its danger grows as a weak dollar continues to flounder forcing oil prices to climb while government debt levels continue to spiral upward. The balance sheets of large corporate entities remain flush with cash. Analysts estimate that over $1 Trillion in cash swells corporate treasuries remaining underemployed on lazy corporate balance sheets. The low interest rate environment has allowed companies to pursue deleveraging strategies considerably strengthening the capital structure of corporate America. To the dismay of politicians and the unemployed, economists speculate that deployment of this cash is still a few quarters away from finding its way into the real economy.

Solutions from Sum2

Sum2 offers SME’s the Profit|Optimizer to help them manage risk, devise recovery strategies and make better informed capital allocation decisions.

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

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Risk: unemployment, recession, recovery, SME

Using Z Score to Manage Financial Health

We use Altman's Z Score as our measurement tool to assess a company's financial condition. It incorporates fundamental financial analysis, offers a consistent measurement methodology across all business segments, and an enhanced level of transparency by use of fully disclosed and open calculation model.

Z Score Advantages

The Z Score provides a quantitative measurement into a company's financial health. The Z Score highlights factors contributing to a company's financial health and uncovers emerging trends that indicate improvements or deterioration in financial condition.

The Z Score is a critical tool business managers use to assess financial health. It helps managers align business strategies with capital allocation decisions and provide transparency of financial condition to lenders and equity capital providers. Business managers use the Z Score to raise capital and secure credit. The Z Score is an effective tool to demonstrate credit worthiness to bankers and soundness of business model to investors.

The Z Score is based on actual financial information derived from the operating performance of the business enterprise. It avoids biases of subjective assessments, conflicts of interest, brand and large company bias. The Z Score employs no theoretical assumptions or market inputs external to the company's financial statements. This provides users of the Z Score with a consistent view and understanding of a company's true financial health.

Background 

The Z Score was first developed by NYU Professor Edward Altman. The Z Score methodology was developed to provide a more effective financial assessment tool for credit risk analysts and lenders. It is employed by credit professionals to mitigate risk in debt portfolios and by lenders to extend loans. It is widely utilized because it uses multiple variables to measure the financial health and credit worthiness of a borrower. The Z Score is an open system. This allows users of the Z Score to understand the variables employed in the algorithm. All the mysteries and added cost of "proprietary black box" systems are avoided empowering users to enjoy the benefits of a proven credit decision tool based solely on solid financial analysis.

The Z Score is also an effective tool to analyze the financial health and credit worthiness of private companies. It has gained wide acceptance from auditors, management accountants, courts, and database systems used for loan evaluation. The formula's approach has been used in a variety of contexts and countries. Forty years of public scrutiny speaks highly of its validity.

Z Score Formula 

The Z Score method examines liquidity, profitability, reinvested earnings and leverage which are integrated into a single composite score. It can be used with past, current or projected data as it requires no external inputs such as GDP or Market Price.

The Z Score uses a series of data points from a company's balance sheet. It uses the data points to create and score ratios. These ratios are weighted and aggregated to compile a Z Score.

Z Score = 3.25 + 6.56(X1) + 3.26(X2) + 6.72(X3) + 1.05(X4) where

X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = Earnings Before Interest & Tax / Total Assets
X4 = Total Book Equity /Total Liabilities

If you divide 1 by X4 then add 1 the result is the company's total leverage.

The higher the score the more financially sound the company.

Z Score Ratings cutoff scores used in classifications:

AAA 8.15 
AA 7.30
A 6.65 
BBB 5.85
BB 4.95
B 4.15
CCC 3.20 
D 3.19

Credit Worthiness and Cost Of Capital 

Lenders and credit analysts use Z Scores because they are effective indicators and predictors of loan defaults. it is an important risk mitigation tool and helps them to better price credit products based on borrowers credit worthiness.

Utilizing a 10 year corporate mortality table demonstrates how Z Score ratings correlate to defaults. Those with a rating of A or better have a 10 year failure rate that ranges from .03% to .082%. The failure rate for those with a BBB rating jumps to 9.63%. BB, B and CCC failure rates are 19.69%, 37.26% and 58.63% respectively. These tables will differ slightly as each producer uses different criteria but overall they are quite similar.

Borrowers with higher Z Scores ratings will have a better chance of obtaining financing and secure a lower cost of capital and preferred interest rates because lenders will have greater confidence in being paid back their principal and interest. Financial wellness is an indication of strong company management and that effective governance controls are in place.

Managing Business Decisions to Improve Financial Health

The Z Score is also a critical business tool managers utilize to make informed business decisions to improve the financial health of the business. The Z Score helps managers assess the factors contributing to poor financial health. Z Score factors that contribute to under-performance; working capital, earnings retention, profitability and leverage can be isolated. This enables managers to initiate actions to improve the score of these factors contributing to financial distress. Targeting actions to specific under-performing stress factors allows managers to make capital allocation decisions that mitigate principal risk factors and produce optimal returns.

Focus areas for managers to improve Z Score are transactions that effect earnings/(losses), capital expenditures, equity and debt transactions.

The most common transactions include:

1. Earnings (Net Earnings) increases working capital and equity.
2. Adjust EBIT by adding back interest expense.
3. Adjust EBIT by adding back income tax expense.
4. Depreciation and amortization expense is already included in the earnings number so it won't have an additional effect on earnings or equity but it will increase working capital as noncash items previously deducted.
5. Capital Expenditures (fixed asset purchases) decrease working capital as cash is used to pay for them (whether the source is existing cash or new cash acquired from debt).
6. Short term debt transactions have no effect on working capital as there are offsetting changes in both current assets and liabilities but does change total liabilities and total assets.
7. Acquiring new long term debt increases working capital, total liabilities and total assets.
8. Typical equity transactions (other than earnings, which we have already accounted for) are dividends paid to stockholders resulting in decreases to working capital and equity.
9. New contributed capital increases working capital and equity.

Scenario Analysis 

Using the Z Score financial managers can actively manage their balance sheet by considering transactions and initiatives designed to impact financial wellness. Considerable attention needs to be placed on how losses, sale of fixed assets and long term debt payments effect financial condition.

In the above we included the basic transactions that would likely occur but you can do the same for any scenario by applying the same concept. It may take a little practice to think in these groupings but you'll shortly find yourself with the ability to project any event. The effects can be measured and revised as necessary by adjusting the contemplated transactions. Remember that several variables exist and that a combination of choices might be necessary to keep your financial strength at the desired level.

Any projection should include the calculation and comparison of key metrics to historical results to ensure that assumptions have been correctly calculated. Significant deviations from prior results should have adequate explanations. Maintaining a strong working capital position can offset the negative effects from increased debt, increased assets and minor earning declines.

Sum2′s Profit|Optimizer

Sum2 publishes the Profit|Optimizer. The Profit|Optimizer is a risk assessment and opportunity discovery tool for small and mid-sized businesses. It assists managers to identify and manage risk factors confronting their business. The goal of the Profit|Optimizer is to help business mangers demonstrate creditworthiness to lenders and make make informed capital allocation decisions.

Sum2 boasts a worldwide clientele of small and mid-sized business managers, bankers, CPA’s and risk management consultants that utilize the Profit|Optimizer to help their clients raise capital with effective risk governance.

Cautions 

Financial models are not infallible and should be used in conjunction with common sense and with an awareness of market conditions. It is important to understand your model so that other considerations can be incorporated when necessary. Note that most models (Z score included) use a proxy (working capital) for liquidity which works well until there are severe disruptions in credit markets as recently encountered. Use caution with all models. Use extreme caution when using a proprietary black box system where you can't understand all the components. Are these users aware or ignorant of possible issues?

Trust but verify seems like a prudent policy.

Conclusions 

The Z Score is a valuable management tool to proactively assess the financial condition of the company's balance sheet, uncover factors that are stressing the balance sheet and initiate actions to improve the financial wellness and credit worthiness of the firm. All business decisions and actions are ultimately revealed in the company's balance sheet. The Z Score measures the effectiveness of business decisions. It empowers managers to anticipate changes occurring in credit worthiness and proactively manage changes in financial condition.

Armed with a tool to calculate future financial positions managers have the latitude to better manage outstanding receivables, improve liquidity and lower their cost of capital. Calls for capital, negotiations for funding or decisions in setting credit policy can now be made from a knowledgeable position with a set of supporting facts.

The Z Score gives business managers an important negotiating tool to defend their credit rating during capital raises when excess leverage or deficient levels of working capital and equity are present.

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