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A Growing Contagion: One in Seven Companies Are a Credit Risk

contagion1-450The H1N1 Swine flu threat may be the big topic on CNN but a growing contagion of financial distress is widely infecting small and mid-sized enterprises (SME) with potentially fatal consequences.

CFO magazine reports that 14% of companies are struggling to pay their bills or are at risk for bankruptcy. These findings are the result of a study CFO conducted on 1500 Midcap companies. The 2009 Credit Risk Benchmarking Report indicated that 550 companies of the 1500 made the credit watch list and over 200 of the names were in or are entering a distressed financial condition.

The report measures each company on three factors: cash as a percent of revenue, days payable outstanding (DPO), and DPO relative to the DPO of that company’s industry. The last of these measures is intended to expose which companies are under performing regardless of the economic condition of their industry as a whole. A company scoring low in all three areas is rated a potential credit risk.

The strain of a two-year recession and limited credit access is taking its toll on small and mid-sized businesses. This development is not surprising. The recession has hurt sales growth across all market segments. Banks, still reeling from the credit crisis are still concerned about troubled assets on their balance sheets. Bankers can’t afford more write downs on non-performing loans. Banks remain highly risk adverse to credit default exposures and have drastically reduced credit risk to SMEs by shutting down new lending activity.

Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs. As a defensive maneuver, SMEs are extending payment cycles to vendors to preserve cash. This same cash management practice is also being employed by their clients resulting in an agonizing daisy chain of liquidity pain. SME’s that have concentrated exposures to large accounts are at the mercy of the financial soundness of few or in some instances  a single source of revenue.

The growing contagion of financial distress is also a major threat to supply chains. Buyers might prize their ability to drive hard bargains with their suppliers but the concessions won may be the straw that breaks the camels back driving a supplier into insolvency.

It is critical that managers understand all risks associated with clients and suppliers. It is critical that managers assess risks associated with client relationships and key suppliers. In this market, enhanced due diligence is clearly called for. The financial soundness of suppliers and clients must be determined and scored so as to minimize default exposures to your business.

CreditAides is a company that delivers  SaaS based financial health assessments on SMEs.  CreditAides reports that their clients are becoming more vigilant and thorough  in their due diligence of customers and suppliers.  They have noted a particular emphasis on the growing practice of reviewing the financial health of suppliers.  Supply chain risk is a heightened risk factor for SME’s due to their over dependence on single source.  Conducting a financial health assessment on key suppliers and other enhanced due diligence practices mitigates a risk factor that could have potentially devastating consequences.  SME manager’s need to button down their due diligence practices  to prevent the sickness from infecting their business.

CreditAides SaaS can be accessed here: www.CreditAides.com

You Tube Music Video: Bing Crosby and Rosemary Clooney,  Button Up Your Over Coat

Risk: contagion, credit risk, counter-party, supply chain, client, recession, banking

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October 9, 2009 Posted by | banking, business, commerce, credit, credit crisis, economics, recession, risk management, SME, supply chain, sustainability | , , , , , , , , , , , , , , , , , , , , , , | 4 Comments

Managing Infuenza Pandemic Risk

pandemicThe Swine Flu outbreak carries with it the potential to severely damage the financial health of small and mid-size enterprises (SMEs). Left unmanaged pandemics can impair profits, generate losses, undermine the contribution of key employees, disrupt supply chains, halt operations, undermine an enterprises financial health that can ultimately lead to bankruptcy.

Though many consider pandemics as a force majeure risk event that cannot be controlled, businesses can take steps to mitigate and manage the drastic challenges a pandemic can pose to a business. This is particularly important for businesses that find themselves in a weakened position due to the recession. Businesses that have become highly stressed due to the current business cycle are at acute risk of becoming insolvent due to the shock of this potentially catastrophic risk event. Business managers, bankers, shareholders and businesses with extended supply chains need to take steps to manage and mitigate the sever effects of pandemic risk.

The first step is to create or update a business continuity plan. Business continuity plans need to address a range of issues that includes planning for disasters and planning for the unique risk factors of an influenza pandemic need to be integrated into business processes.

All businesses are unique. Addressing a pandemic risk event in your business plan will require you to conduct a risk-management assessment on all aspects of your operations, business processes and market impact to ensure continued operation and financial health.

Some things management must consider in its review are:

  • Assess how you work with employees, customers, contractors to minimize contagion threats
  • Determine mission critical business functions your business requires to maintain operations
  • Stress test your business operations to determine how to function with up a 40% absentee rate
  • Review inventories in case foreign or domestic suppliers and transport services are interrupted
  • Review your supply chains, determine at risk suppliers and identify backups
  • Reorganize work spaces to minimize the spread of the disease
  • Equip employees to support telecommuting
  • Develop communication strategies to inform employees, customers and the media
  • Use this opportunity to expand your e-commerce capability
  • Promote awareness of the problems associated with pandemic flu
  • Alert employees about what steps you’re taking and what they can do to limit the pandemic’s impact
  • Review sick-leave and pay policies to ensure they don’t discourage workers from staying home when they’re ill
  • Make backup plans if you need to pull people out of countries where the epidemic strikes
  • Develop a travel policy that restricts travel to areas where the virus is active
  • Stock up on masks and sanitizers, and consider staggering work hours to limit the size of gatherings

Sum2 publishes the Profit|Optimizer product series.  The Profit|Optimizer is the leading SME risk management platform that helps business managers and business stakeholders quickly assess enterprise risk factors and take considered action to mitigate and manage those risk factors. Sum2 will be releasing a pandemic risk assessment module by the close of this week.  The product will retail for $95.00 and will assist SME’s to assess, mitigate and manage the threats posed to their business by pandemics and other social disasters.

More information can be found on our website www.sum2.com.

Sum2 help our clients assess risk and realize opportunities.

April 30, 2009 Posted by | business continuity, disaster planning, recession, risk management, Sum2, supply chain | , , , , , , , , , , , , , , , , , | Leave a comment