Getting the credit for risk management
Eddie Pacey talks up a tool that he believes can help firms make an enlightened credit decision
I have observed with great interest the various posts and recommendations of many regarding risk and portfolio management. It is clear that many experienced individuals have a good grasp of requirements in either bank lending or commercial trade credit.
A decade ago, I came to the conclusion that the use of third-party data, that is to say the typical business report provided by major companies such as Dun & Bradstreet, Experian and others preceding them, would become less relevant in the context of determining risk.
Users would demand faster, cost-effective solutions in a context of data provision along with greater flexibility and functionality, preferably online and with greater percentage accuracy.
The range of services offered has definitely widened, but the underlying quality of data, the way in which it is presented, and the overall objectivity in terms of interpretation, remain very much the same for many.
Provision of financial data and ratios are still "clinical" and while some work with clients to integrate ERP data downloads giving information on payment trends, this was never a total commitment by all and nor was the data aligned to industry sectors to give it real meaning.
In any event, my experiences have always been that payment on time is not necessarily an assurance of a client's standing or health; indeed, on the contrary, in the world of IT distribution some 85 per cent of bad debt experienced as a consequence of insolvency arose when the debt sat in the "current" column.
In engineering and manufacturing sectors, it usually resided in the 90+ column. No one pays his or her principal suppliers slowly or late – and if they did, you'd know it.
For many years I sought a provider that would deliver a consistent approach to data; one that could demonstrate tangible research into the solution offered and a really good track record of identifying both risk and opportunity.
I found this in Company Watch – a business effectively set up by people previously at the coal face in commercial bank lending but who felt that traditional tools at their disposal, including the well-known Altman Z-score rating system, were not quite good enough at delivering consistent, sound lending decisions.
Company Watch offers the H-Score, a comprehensively tested scoring system, a probability-of-distress rating, a credit rating almost identical to that of credit insurers, and a suggested credit guide (for those purists).
What attracted me was the financial modelling facility for editing financial information. This allows the insertion of new periods and interim financial information, thereby creating new scores at the press of a button, and also the creation of "what-if" scenarios.
The systems functionality alone was worth the annual licence fee. Such tools are valuable for anyone serious about portfolio management as a tool to manage risk and note growth opportunities.
Eddie Pacey is managing director of EP Credit Management & Consultancy