The current climate of uncertainty, as a result of the international crisis, has modified the traditional way in which financing granting companies have been evaluating credit applications.
By not being able to use the Net Cash Flows or the Projected Cash Flows as a reference, as there is no medium certainty of the growth and net profit figures of the businesses; Some of the Risk Units of financial institutions have been forced to place greater emphasis on qualitative tools, such as the SWOT and the Porter Diamond. The only thing that can really be known with certainty is the liabilities that keep business.
The current climate of uncertainty, as a result of the international crisis, among its multiple effects, has motivated some of the financing granting companies to reassess the way they have been analyzing credit applications from their clients. The Risk Units of these financial entities have been forced to review the advantages and disadvantages of their traditional approach to quantitative analysis of historical financial statements and Projected Cash Flows.
The inability of the businesses to project with certainty their billing and profit volumes, implies a significant margin of error in the Projected Cash Flows, which make their use almost useless. The figures for 2008 will not even remotely be repeated in 2009 and, consequently, the Net Cash Flow (FCN), calculated based on these figures, is not useful.
Faced with such a dilemma, the Risk Units are faced with the dilemma of continuing with the traditional quantitative analysis with some variants, such as the use of scenarios (optimistic, normal or pessimistic), or placing greater emphasis on qualitative tools, normally forgotten in times of growth and staging in times of crisis.
At the national level, with sectors affected by the crisis, such as agro-export, mining, textiles and transportation; and, in a matter of time, the other items of the economy; Some of the Risk Units of the credit granting entities have already taken the first step.
The most common qualitative analysis tools are the SWOT and Porter's Diamond.
SWOT
The SWOT evaluates the strengths, opportunities, weaknesses and threats of the business. The strengths and weaknesses are determined within the business and the opportunities and threats outside it.
The analysis of the interior of the business could focus on the Value Chain (Porter, 1985), identifying where its strengths or weaknesses are generated, if in the primary activities (inbound logistics, operations, outbound logistics, marketing and sales, services) I am supportive (company infrastructure, human resources management, development technology, supply).
As an explanation of the SWOT method, we will comment on the case of a heavy machinery rental company, with a large fleet, mostly its own, which has a Service Contract with a first-rate Gold Mining Company, where it has been a supplier for more than 15 years. However, the majority shareholder and General Manager of the company is an elderly person, without a succession line protocol.
The strengths of the company would be:
- It is a supplier of a first-rate mining company, whose main product, compared to other minerals, has a much lower price fluctuation. It has a service contract. It has been a supplier for more than 15 years, which implies a certain degree. loyalty. It has a large fleet of machinery, mostly its own.
Among its weaknesses would be:
- Advanced age of the majority shareholder and General Manager of the company. Lack of succession protocol. Dependence on a single client.
Regarding threats, we could find:
- Reduction of order orders and profit margins of the business, due to the greater supply of machinery rental services, from other suppliers from mining companies affected by the crisis. Clauses of the Service Contract indicate that the Mining Company You can terminate it just by communicating your decision 30 days in advance. Falling gold prices, which would result in reduced demand for heavy machinery rental services.
Opportunities could include:
- Incursion into new markets, such as the construction of roads and communication routes, which the Government intends to implement in its Anti-Crisis Plan.
A second step would be to determine if:
- Can the company use its strengths to take advantage of the opportunities that arise?
In our example, having a large fleet of machinery would allow the company to enter new markets, such as the construction of roads and communication routes, which the Government intends to implement in its Anti-Crisis Plan.
- Could the company use its strengths to avoid threats?
Given the possibility of termination of the Service Contract and the threat of a reduction in order orders and profit margins of the business, due to the greater supply of machinery rental services, from other suppliers from the affected mining companies Due to the crisis, the company could use as an argument the loyalty demonstrated through its 15 years of supplier, as well as the quality of its services.
- Can the company overcome its weaknesses by taking advantage of opportunities?
The company could establish a succession protocol and form alliances with third parties, so as not to depend on a single client and take advantage of the opportunities to enter new markets.
- Can the company minimize weaknesses and avoid threats?
If financial difficulties arise, the company could dispose of assets, considering that its large fleet is mostly owned. Additionally, it could reduce your expenses, paralyzing some units.
A third and more complicated step and, at the same time necessary, would be to grant a value (according to its relative importance) and a weight (according to its degree of attractiveness in the opinion: 1 = not attractive, 2 = somewhat attractive, 3 = more or less attractive and 4 = very attractive) to each SWOT variable, after which a total score (greater or less than 5) would be obtained, which would determine the approval or not of the credit operation. As a tentative way I could point out:
A second qualitative analysis, complementary to the SWOT, is that of the five forces of Michael Porter, which considers: 1) The threat of entry of new competitors, 2) The bargaining power of suppliers, 3) The bargaining power of buyers, 4) the threat of entry of substitute products and 5) rivalry between competitors.
For the evaluation of this method, we will consider the case of a company that manufactures bodies for transporting heavy loads.
- Threat of entry of new competitors. The body market does not register barriers to entry. Any new participant can come with new resources and capabilities and seize a share of the market. Bargaining power of suppliers. Steel constitutes almost 65% of the cost of manufacturing the bodies. It has no substitutes and the distributors are few in the national market. Sales are mostly cash. Bargaining power of buyers. The final product is not differentiated, which gives bargaining power to the car body demanding carriers, who can demand discounts, even more so if the current contraction of demand in the item is considered. Threat of entry of substitute products. The substitute for steel bodies is aluminum, which, while reducing tare,They are higher priced and are not produced in the national market. Rivalry between competitors. The current contraction in the demand for bodies by carriers, due to the reduction in freight, is expected to generate fierce competition with the leading manufacturers of bodies, who, facing higher fixed costs, will be willing to sacrifice margins.
Finally, we must take into account that the threats do not always come from the same field, for example, in the case of universities, the threats could come from the Business Schools that decide to integrate backwards, as was the case with ESAN. A simpler case is restaurants, whose threat now comes from supermarkets, which offer ready-to-eat food. As can be seen, the competition will not always be visible.
Conclusions
The current climate of uncertainty, as a result of the international crisis, has modified the traditional way in which financing granting companies have been evaluating credit applications. By not being able to use the Net Cash Flows or the Projected Cash Flows as a reference, as there is no medium certainty of the growth and net profit figures of the businesses; Some of the Risk Units of financial institutions have been forced to place greater emphasis on qualitative tools, such as the SWOT and the Porter Diamond. As a corollary, we could say that in the current situation, the only thing that can really be known with certainty is the liabilities that businesses maintain.
