Accessing
Capital
2015 &
Beyond
Dublin Chamber of Commerce
1 May 2015
www.moorestephensnathans.com
PRECISE. PROVEN. PERFORMANCE.
Moore Stephens
Structure to Presentation
1. Introduction
2. Banking and Accounting – A Brief History
3. Banking in Ireland Post 2008 – A Changed
Environment & Impact on SMEs
4. Credit for SMEs – Demonstrating Capability
5. Our Service Offering
6. Conclusion
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1. Introduction
Moore Stephens Nathans
www.moorestephensnathans.com
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About Moore Stephens Nathans
General
• Ranked in top 10 accountancy practices in Ireland
• Offices in Cork & Dublin
• 10 Partners & over 120 staff
• Affiliated to Moore Stephens International
• Growing speciality in niche areas
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Our New Service
Banking, Strategy and Business Organisation
• New Division headed up by Pearse O’Donovan
• Why ? Bridge gap between SME and Funders
• A supply and demand issue:
• SME economy has demand for credit
• Funders ready and willing to supply credit
• But gaps exist – a mismatch of expectations..
• MSN can facilitate bridging these gaps.
• A role for specialists
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SME Sector
Overall Importance
• General definition of SME – Turnover <€50m and
<250 employees
• Services/Manufacturing/Construction
• Estimated to be between 180,000 to 200,000
SMEs in Irish Economy
• Total Turnover €147Bn (€175Bn peak)
• Ongoing funding requirement of €50bn
SME Sector
Overall Importance
• Credit is a vital ingredient of a functioning economy
• The SME sector is a vital component of the national
economy
• Ensuring a functioning credit market for the SME
sector is in everyone’s interests…
• As accountants, we believe we have a key role to
play to unlock the funds that are available
• To provide a gateway…..
2. Banking and Accounting
A brief historical journey
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Banking & Credit
Early Origins
• The need for banking traces back to when
man evolved from hunter gatherer and began
to trade
• Credit was needed to fund crops and cattle
• Evidence of banking traces back to 2,000BC
in Babylonia (Modern Day Iraq)
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Banking & Credit
Medieval Europe
• Banking made major advances in Medieval
Europe
• Traders in Northern Italy, Lombards, developed
more sophisticated banking structures
• Piazzas in Genoa, Venice and Florence enabled
the provision of credit
• Credit was provided on benches – “banca”
• When the bench ran out of money, the bench
was rotten, “banca rotta” i.e. bankrupt
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Banking & Credit
The First Major Bank
• First major Bank was “Medici Bank” near Florence
• Grew sophisticated internal systems
• Expanded across borders
• Became first major multinational bank
• Brought down by its London branch
• Who decided to fund the War of the Roses
• A failure in governance and risk management of sorts…..
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Banking & Credit
Emergence of Accounting
•
As banking evolved, so to did the need for strong financial
information
•
Double entry accounting also emerged in Italy in Medieval
Europe. Lenders needed information to manage their risk
Luca Pacioli
• Franciscan Friar
• From Venice
• “Father of Modern Day Accounting”
Banking & Credit
Summary
What does history teach us ?

Credit has been, and always will be, a core requirement in a
functioning economy

Accounting information is needed to support credit decisions
What is the problem now?
 Rapid change in the environment – Boom/Bust
 A call on businesses’ ability to know this environment and
survive in it impacts on how credit is accessed
 How can we increase awareness and ability to cope?
Back to the principles …..
 Accounting – The numbers never lie.
3. Banking in Ireland Post 2008
A changed environment
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Banking in Ireland Post 2008
Summary
• Confidence was shattered by failures in credit risk
management from pre 2008 driven by market complexity
and ability to respond
• Response via three pronged approach:
Capital/Regulation/Credit Management
• Primary repair to system was quantitative; recapitalisation
with robust capital buffers and shock absorbers.
• Followed by regulatory codes
• But equally important are qualitative changes; changes to
the way banks think about credit
• Banks have strengthened credit management operations
Banking in Ireland Post 2008
External Forces: Central Bank & Basel
External regulatory influences to the credit decision
• Regulatory Capital Requirements
• Involvement of Central Bank and Regulatory Codes of
Practice
• Trust
• Buffers for environmental change
Banking in Ireland Post 2008
Quantitative Changes In Credit Model
• Focus on risk weighting
Credit Type
Risk
Amount Weight
Risk
Weighted
Assets
1
AAA Sovereign Treasury Security
100,000 3%
3,000
2
3
4
Residential Mortgage
SME Business Facility
Commercial Real Estate Facility
Total
100,000 25%
100,000 75%
100,000 125%
400,000
25,000
75,000
125,000
228,000
Banking in Ireland Post 2008
Qualitative Changes In Credit Model
• Primary change relates to risk management being introduced
pre 2008 but prominent in 2015
• Measure exposure in event of default
• Measure probability of default
• Measure loss in event of default
• Measure based on remaining term of the facility
• When banks make an assessment of risk, the bank needs
assurance as to how the borrower has performed, expects to
perform, manages its risk, and controls finance
• Need to produce Information
Banking in Ireland Post 2008
Credit Decision
Minimum Credit Criteria
 Industry & Economic Risk Assessment
 Clear Strategy and Clarity of Understanding
 Information demands and expectations (ongoing/IBR)
 Performance, Experience, Forecasting
 Term, Debt Service Cover & Gearing (times Ebitda, Sec)
 Business Management: Risk, Financial capability, Controls
 Understanding of cash flow cycles and sensitivity analysis
 Financial Covenants: Ongoing reporting and metrics which
confirm the long term viability of the business
Ireland Post 2008
Added Complexity in Decision Making
Credit
Risk
Analysis
Capital
Regulation
Credit
Decision
Ireland Post 2008
SME Relevance
• Higher informational demands place pressures of the SME
sector.
• It is easier for larger corporates to deliver this information.
• Larger corporates have human and monetary resources to
install stronger systems of governance and reporting.
• But the resource capability of SME’s to meet these
informational demands presents a challenge
• But the challenge can be addressed through support ….
Ireland Post 2008
Functioning SME Economy
Financial
Institutions
SME
Sector
• What are risks to a functioning credit model:
• Lack of supply
X
• Lack of demand
X
• Lack of information
√
• No different to Italy in Medieval Times….
4. Credit for SMEs
Demonstrating capability
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Demonstrating Capability
Principles
• Lenders examining ‘probability of default’ must get
assurance that the borrower has the ability to repay debt not
only now but into the future
• SMEs must show capability to provide this assurance
• How? robust decision making processes
• Key management aspects of this are:
1. Strategic management processes
2. Internal financial controls
3. Risk management systems
4. Management information systems
Demonstrating Capability
1. Strategic Management Processes
•
SMEs must demonstrate ongoing viability
•
“Viability” = French origin, “vie”, life
•
Viable = capable of life survival
•
Needs a robust business logic represented by Organisational
Strategy
• Strategic Choice
• Resource, Structure, Financial & other Projections
• Plans, Policies, Administration and Systems
• Controls and Ongoing Evaluation
• Ongoing loop
= Structured process to direct the SME long term and ensure
viability
Demonstrating Capability
2. Financial Controls
•
Internal controls that govern finance
•
Internal control, in broad terms, refers to the systems that
the SME has to safeguard company wealth
• Liquidity management
• Cost Control and Budgeting
• Internal Alignment
• Account reconciliations (banks, suppliers, payroll)
• Reporting and Tax compliance
•
SMEs must demonstrate robust control environment
Demonstrating Capability
3. Risk Management Systems
• Systems to identify, manage, monitor and report on risks
that the SME is, or ought reasonably, expect to be exposed
to
• This is not something new. SMEs intuitively have been
doing this in the past. But in the past was a simpler business
environment
• Now more complex systems are needed for a more complex
environment
• Capable of demonstrating this capacity – ensure viability
• What are your key risk indicators and how are these
reflected in how you run your business? How do you monitor
and manage them?
Demonstrating Capability
4. Management Information Systems
• Management information by definition must be:
• Timely
• Reliable
• Relevant
• Not just meeting compliance requirements, but informing
decision making
• Management Accounts and Rolling Cash flows
• Key Performance and Risk Indicators:
• Liquidity metrics
• Operational metrics
• Sensitivity and Trend analysis (internal/external dynamic)
Demonstrating Capability
Strategic Thinking – Business Logic
Environment, Industry and Internal factors
Strategy: Direction Organisation takes to meet its
objectives – Business Development/Admin/Resources
Decision making managed by Projections, Planning,
structure, policies, procedures and controls
Ability to adapt: Awareness of threat and change
impacting Strategy
Key Organs of Organisation = Management, Risk
and Financial Functions
Demonstrating Capability
A logical flow
SME
Sector
Financial
Institutions
Strategy
Risk
Management
Financial
Controls
Management
Information
This is the challenge for SMEs
Control &
Adaptability
5. Moore Stephens Nathans
New Banking, Strategy & Business
Organisation Service
www.moorestephensnathans.com
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Moore Stephens Nathans
Banking, Strategy and Business Service
Why
 Response to demands from SME & Market Gap
 Recognition of emerging gulf between bankers and
business
 Infrastructure of Advisory in Ireland - not an intellectual
issue but a resource issue
 We need to bridge the gulf
 Requiring a spectrum of expertise and experience across
banking, organisational know how and accounting
Moore Stephens Nathans
Banking, Strategy and Business Service
Who?
Those looking for funding, those looking to turn things around, those looking
to position themselves for the future. Direct or with advisors.
What?
 Detailed initial lending assessments based on funding requirements
 Assessment of strategy, finance function, risk management,
corporate governance
 Bespoke change management services on any or all of the above
 Engage with Banks and Secure funding
 Ongoing monitoring to ensure Covenant Management with data room
facility for client and bank
 Available to banks to produce enhanced IBRs.
Moore Stephens Nathans
The Process
Assess
Lending
need
Diagnose
&
Prescribe
Predict
Source
Funds
Monitor
6. Conclusions
What is our message?
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Ireland 2015
Alignment
Cogs must be suitably
aligned to their
environment.
SME
But environments do not
stand still
Advisors
And reactions lag…..
Banks
He who adapts best,
wins…….
Information = oil
Conclusions
Key Message
•
Who is this for? Cradle to Grave Market
•
MSN can partner with SMEs & Advisors
•
Offering
 Diagnosis i.e. comprehensive preliminary assessments
 Prescribe i.e. address areas requiring attention &
overhaul
 Predict i.e. risk management
 Successful treatment i.e. Capital accessed
 Monitor i.e. ensure ongoing viability with data room
interface between MSN/Client/Bank
SME Sector
Overall Importance
• Because after all
 Credit has been, and always will be, a core requirement in
a functioning economy
 Accounting information is needed to support credit
decisions
It has always been thus. What has changed in Ireland is the
environment. Not the principles………