Credit risk part 2 of 3: External Risk Data

In the current economic climate, managing a credit rating and obtaining finance is more important and difficult than ever. It is vital that companies are provided with the right information from the market and credit rating agencies, to ensure their credit and risk evaluation shows them in the best light.

Part one of this series covered the basics of ensuring information is available to relevant parties to help them better assess your company risk. Parts 2 and 3 focus on the types of information you may need to provide. This issue covers the types of external information that potential investors, creditors or credit rating agencies may find helpful when assessing your business.

Outline the industry and its environment in general
Start by compiling a list of external factors to view the bigger picture and then take a closer look at the details. Some solid foundations would include:

•  Maturity of the market and technology
• Cyclicality – if income is seasonal provide percentages showing how income and activity is spread across the year
• Competition – detail who the top performing companies are and who you compete with directly
• Barriers to entry
• Substitutes for the industry’s products
• Sectors
• Demand factors – explain if and how the business is affected by specific issues. For example an expected change in legislation.
• Customers
• Environmental impact and Social responsibility issues – This area has a much higher profile than a decade ago, If your policies are green and cost-effective you should be letting people know. If they are not, then maybe you need to revisit this area.
• Geographical information
•  Regulatory environment

Set out specifics affecting the business
Outline the risks from the point of view of the company, and how they are likely to develop over time. Are there any issues with under or over capacity? If so, how are these issues expected to progress in the coming months/years. Is there growth or decline in specific product lines? What are the plans to maximise the income or minimise the possible loss?  What about the product mix? Is it changing, does it need to in the future? Think about out what your audience may want to know, an investor may be interested in the capital intensiveness of the business or the supply chain and any potential synergies. A potential business partner may want to know how you plan to manage upcoming changes such as the phasing out of a specific product or service.

Don’t assume
Finally - Don’t assume people know what you know; even industry analysts will not have your level of insight. There may be a competitive cost to providing all the information a risk assessor would like to see but most external information is already out there. It is just a case of collating and making it focused and easy to use.  If this seems like a daunting task ask your business advisor for assistance.

For more information please visit www.wardwilliams.co.uk

Keep in touch, Part 3 of this series: Internal Risk Information coming soon...