Agenda
Risk – Industry Definitions
Credit Risk – Its positioning
Your average large company and risk
Risk – Internal & External
Letters of Credit
Workflows
Credit Risk Tools
Summary
Enterprise Risk
Management aka “ERM”
Enterprise risk management (ERM) in business includes the
methods and processes used by organizations to manage
risks and seize opportunities related to the achievement of
their objectives. ERM provides a framework for risk
management which typically involves identifying particular
events or circumstances relevant to the organization's
objectives (risks and opportunities), assessing them in terms
of likelihood and magnitude of impact, determining a
response strategy, and monitoring progress. By identifying
and proactively addressing risks and opportunities, business
enterprises protect and create value for their stakeholders,
including owners, employees, customers, regulators, and
society overall. (Wikipedia)
Operational Risk
A form of risk that summarizes the risks a
company or firm undertakes when it attempts to
operate within a given field or industry.
Operational risk is the risk that is not inherent in
financial, systematic or market-wide risk. It is
the risk remaining after determining financing
and systematic risk, and includes risks resulting
from breakdowns in internal procedures, people
and systems.
(Investopedia)
Credit Risk
The risk of loss of principal or loss of a financial
reward stemming from a borrower's failure to
repay a loan or otherwise meet a contractual
obligation. Credit risk arises whenever a
borrower is expecting to use future cash flows to
pay a current debt. (Investopedia)
In B2B, we develop strategies to assess this on
our customer portfolio bearing operational risk
in mind.
Risk Propensity
Degree to which an entity is willing to take chances
with respect to risk of loss. (businessdictionary.com)
A company may not be sure of its risk propensity
point until you ask, so ensure the person you seek
clarification from is high enough in the organisation
to define it (with you) should the propensity point not
exist based on the circumstances the company
operates in.
Incoterms – ICC Charter
1958
Incoterms are a set of internationally recognised
terms that govern the liabilities of shipments over
international borders between all parties involved in
a legally binding manner.
First used in 1936, they were formally recognised in
the International Chamber of Commerce (ICC) Treaty
of 1958 and last updated in 2010. They covers areas
such as shipping documentation content, party,
counterparty and 3rd party liability, insurance and are
used in finance instruments such as letters of credit.
Popular Incoterms
All Transport Modes
EXW Ex Works
CPT Carriage Paid To/ CIP Carriage And
Insurance Paid To
DAT Delivered At Terminal/ DAP Delivered At
Place
DDP Delivered Duty Paid
Popular Incoterms
Sea Transport
FAS Free Alongside Ship
FOB Free On Board
CFR Cost and Freight
CIF Cost, Insurance and Freight
Enterprise Risk Management Framework
“Credit Risk Positioning”
Credit Risk?
Heart of ERM
Managing Risk
Mitigating Bad Debt Loss
Identifying External Threats
Increasing Process Control
Informing Management early
Your average large
company and credit risk
2011 RIMS Survey: 17% of large companies have a full formal
ERM programme, 37% have a partially deployed ERM
programme totaling 54% of large companies that have a full
formal ERM programme. This net number is up from 36% in
2008.
By extension 46% of large companies have an informal risk
management programme (or none at all) which may or may
not include credit risk.
RIMS (Risk Management Society) Source Document
http://www.rims.org/Sales/Documents/RIMS%202011%20ERM%20
Benchmark%20Survey%20final.pdf
Internal Risk
Process efficacy – effectiveness of business process
management on a company in terms of achieving
desired outcomes in a lean cost effective manner
Governance – Internal controls designed to mitigate
against financial and non financial risks
Reporting – Identification of internal threats and the
mechanism to report them into a remediation
process
External Risk
Markets – direct/indirect risk exposure surrounding a market
including market forces, changing trends, new products/services,
market disrupters and new laws or regulations affecting all market
players
Country – direct/indirect risk exposure to a country in terms of
political risk, economic risk, geopolitical shifts and future laws or
regulations affecting the level of risk a company is exposed to
Political Risk – The level of political risk a company is exposed to on
the supply side of the business, including international footprint
analysis (Plants/SSCs/Sales Offices/Indirect Presence/etc), ETOP
analysis and how political shifts could alter the operating
environment affecting compliance, production, supply chain and
vendor management.
Letters of Credit
Secure form of payment in high risk counter party countries
Expensive given counter party costs by the bank and Letter of Credit terms
can escalate marginal costs dramatically
Process MUST be defined and strong enough to process letters of credits in a
defined timeframe
New account opening procedures should consider letters of credit as a
security option to prepaid business where high value transactions occur with
the customer or are at least projected as such
Letter of credit process must term based and flexible enough to handle
unusual terms (e.g. 50% draw down on unit delivery, 50% 90 days after or
when certificate of compliance is issued) and map the risk impact on the
account, party and counter party and the company in general
Letters of credit process is mainly an order management and collections
process but should always have a credit risk involvement
Credit Risk
“Where to start?”
Understand your companies “risk propensity” and
managements positioning of credit risk in the
organisational chart
Understand the order 2 cash process for the
company including its dysfunctions in great detail
Understand the wishes, perceptions and concerns
key stakeholders have in a credit risk service for the
company. The main stakeholders are Sales and
Finance management.
What a good industry credit risk
service should do?
Aid continuity and growth by;
Vetting all new credit accounts thoroughly through credit risk appraisal
Periodically appraising existing accounts by customer and/or by ledger
Validating and monitoring customer master-file data accuracy integrity
Monitoring country risk factors for changes in exposure both direct and
indirect to the companies trading presence
Monitoring investment risk factors should as FX, capital markets and
macroeconomic shifts (inflation, etc.)
Provide expert advise and input to any project and/or systems based
initiative that has a credit risk element
Control, report and action internal process controls surrounding credit risk
and data accuracy
Workflow Description
New Customer Account Opening
CR1 Application form completed fully – CR2 Rep gets management discounts and set up
approvals – CR3 Credit Report from 3rd party Vendor (e.g. D&B) is ordered
CR4 Verification of ALL relevant and legally important information as correct – CR5
Verification of confirmed details as set up on the customer master-file
CR6 A financial risk appraisal on the customer is done concentrating on solvency, liquidity
and asset profile
CR7 The country risk exposure analysis is performed - CR8 A credit risk opinion of the
proposition based on terms and credit limit sought is formed
CR9 Submitted for approval in line with company policy – CR10 Account trading line
opened.
CR11 Documents filed in line with company policy
Workflow – New Account Set up
Workflow - Ledger Risk
Evaluation
Aged Debt by Invoice Analyzed
Invoices past due total and ageing to Risk Score (test for score
accuracy to policy)
Credit Invoices open to Debit Invoices (evaluate pattern for cash
allocation process issues which have collection effect)
Returned Payments Analysis
Country Risk analysis on high value accounts
Individual Risk analysis over certain account balance value based
on a process like the “new account opening” process detailed in
this session
Report with findings on internal and external risk indicators
prepared and sent to management including red flagged accounts
with recommendations
Month End Controls…
Master-file Data Changes – Reconcile Customer Account Changes to
Approved Control Registers of Change and Set up
Country Risk Report Summary – Summary Report of Risk Highlights
on all territories that company has an exposure to
Internal Risk Report – Report on months internal risk and controls
issue findings
External Risk Report – Report on months external risk findings
Customized reporting can be generated under this top line reporting
line once it creates value through informing management or
prompting follow on actions in a control environment.
Credit Risk Tools..
Bloomberg Company Search
Credit Risk Tools…
The Country Risk Report..
Summary – Overall Score
Macroeconomic Indicator Summary (e.g.
GDP/GNP/Payment performance/Business Summary)
Geo political movements/updates (e.g. New
elections/alliances/pledges such as crackdown on political
corruption/etc.)
Trading movements/updates (e.g. Import/Export trading status
report/FX trading report)
New laws or regulations of note (e.g. new FX Controls)
Relevant News to Business
Recommendations
Credit Risk Tools…
The Credit Report
Customer details (confirmed)
Customer legal/regulatory status report
Customer payment record
Customer financial records
Customer reports/ media reports
Score and risk opinion
Summary
Manage, mitigate and report!!!
Processes should be creating value by the information that is collected,
collated and reported upon
Integrity of financial and non financial risks should be monitored consistently
through the credit risk process structure
Accounts should be credit risk appraised at least every 3 years, with high
value accounts appraised annually
Process improvement and alteration is a must as the quality of information
inwards determines the quality of information outwards
Cost effective processes are only “effective” if they add value. Justify all
expenditures in value terms for what they do and what they prevent/mitigate
Be professional, insightful and diligent
Thank you for your time…