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Your customer is king, but what if the customer doesn’t pay ? Know your European rights. September-October 2012 Paul Becue General Manager EHSB Contents 1. Impact bad payers on our company. The interest of working capital on the treasury. 2. Credit management: what are the tools at the disposal of the company to do it in an efficient way 3. Factoring 4. Credit Insurance 5. The legal environment 6. Conclusion Date | © Copyright Euler Hermes Credit Management Credit Insurance Definition CM •Credit management concerns the management of TRADE credits which companies grant to each other, as a consequence of the sale of goods and services =debtor management: a combination of preventive and curative actions (e.g. legal procedures) which try to diminish the risk on customers, and to increase the profitability of the company, without neglecting too many commercial opportunities •WATCH OUT: i.e. not the management of bank credits on the long and short term, neither of bonds issued on the capital markets, mortgage credits, … Date | © Copyright Euler Hermes Credit Management Credit Insurance Importance CM •Optimization of trade flows •Improvement of the circulation of the debtor/buyer capital •Limiting and managing buyer risks •Positive contribution to the t/o targets •Positive contribution to the economic value of the organization Essential in Working Capital management Date | © Copyright Euler Hermes Credit Management Credit Insurance Task Credit Manager •Maximum volume of sales + quick payment + minimum volume of dubious receivables •« Sales are vanity, profits are sanity » •Credit manager has to fix the credit strategy and credit policy: -The credit norm, or the minimal credit worthiness level with which the debtor has to comply. The score/rating from a third party can serve as an objective instrument -The credit conditions: cash payment, or after a certain period -The collection policy which has to be followed in case of late payments Date | © Copyright Euler Hermes Credit Management Credit Insurance Key Performance Indicators (KPI) •Average days of customers’ credit: trade receivables within maximum one year - received advances (on B/S) -------------------------------------------------- x 365 days annual turnover (inclusive VAT) •Days Sales Outstanding (DSO): outstanding trade receivables end of period ------------------------------------------------- x days during that turnover in the considered period period (e.g. 90 days) (e.g. 90 days) Date | © Copyright Euler Hermes Credit Management Credit Insurance Key Performance Indicators (KPI) Calculation DSO (x thousand euro) Incoming payments Sales Jan Feb Mar Apr May Jan 100 20 30 40 10 Feb 200 40 60 80 20 Mar 300 60 90 120 Jun Q1 Total received amount by month 20 70 160 Total outstanding amount end of month 80 210 350 DSO-30 35 DSO-60 42 DSO-90 52,5 Date | © Copyright Euler Hermes Credit Management Credit Insurance 30 Key Performance Indicators (KPI) •Analysis of age: receivables are ranked according to their age •Calculation based on proportion: -the sum of the receivables in a given age category -the total sum of the trade receivables Age of the receivable Amount (x thousand euro) % of the total outstanding receivables 0-30 days 160 57.14 % 31-60 days 100 35.71 % 61-90 days 20 7.15 % More than 90 days 0 0% Total 280 100 % Date | © Copyright Euler Hermes Credit Management Credit Insurance The credit risk can, in a given year, mean profit or loss for the company (on the P&L of the company). complete agreement agreement 0.0% 20.8% moderate agreement 33.3% disagree 25.0% totally disagree 20.8% Source: Belrim Date | © Copyright Euler Hermes Credit Management Credit Insurance The quality of my credit management is an essential factor in the performance of my company. complete agreement agreement 7.7% 3.8 % 38.5% moderate agreement disagree 50.0% totally disagree Source: Belrim Date | © Copyright Euler Hermes Credit Management Credit Insurance A good internal Credit Management within a company Law of August 7, 2002 (based on old EU Directive 29/6/2000): - maximal payment term: 30 days (but everybody is free to deviate from it = commercial) - delay interest: tariff ECB + 7%. - payment collection charges New European Directive 2011/7/EU: public authority < 60 days (16/02/11) • Criteria good credit management - financial and commercial department within a company have to be on the same line; - diminish the number of granted trade credit days - analysis aging balance outstanding receivables: the older, the bigger the risk - good follow-up invoices (warning letters) - credit insurance = important support for analysis buyers + follow-up risk. Date | © Copyright Euler Hermes Credit Management Credit Insurance TOOLS AGAINST INSOLVENCY Different kinds of products: • Cash payment • Guarantees (personal, bank,……) : L/C + stand by L/C • Guarantee/caution funds (private and public) • Factoring (insolvency, administration, financing) • Suretyship insurance (insured = debtor) • Credit insurance (insured = creditor) Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis: the 5 C’s Character= former payment behaviour Collateral= in principle not available for CI/supplier Capital= financial strength Capacity=CF sufficient to support repayment capacity outstanding debts Conditions= general economic environment Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis A. Political risk=sovereign ceiling Political facts : Sensu stricto : war ; revolution ; government decision which hampers the execution of the contract? Sensu lato : - the catastrophe risks (earth quakes) ; - transfer risks ; - insolvency public buyer. Insolvency is central Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis B. Commercial risk: principles in the underwriting of risks. a) Application of the rules of consistency with previous credit limit decisions. b) Check of the general economic climate and the commercial environment: sector : take care of the hotel and catering industry (code Nace-bel : 6xxx) ; type of activity : trading : low solvency rate; industry : high solvency rate. region : a famous neighbourhood (zip code : XXXX + name street). Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis c) Verification of the legal form of the company and the links in the appendixes of the Official Journal : administrators already involved in a bankruptcy. d) Use of updated financial information=annual accounts (BE GAAP/IFRS). Structure B/S : - NW-immaterial fixed assets=TNW; - solvency rate; - liquidity > 1. P&L : - profitability : operational cash flow (=EBITDA). - rotation customer- and supplier credit. Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis e) Estimate the quality of the management and the shareholders: - capable management (no negative experiences) ; - support of the shareholders. f) Estimate the relationship which the debtor has on its customers and suppliers: ex. is the customer portfolio diversified or concentrated on a few big ones. g) Verify the history of the company. Is it a young or an old company? Sole trader should be older than 1 to 2 years. h) Check the payment experience : extensions ; delays. The existence of actual claims (worldwide) is very negative, especially if they remain outstanding some time without any solution. Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis i) React on negative information: – delay in the social security (RSZ) contributions (> 20 % yearly contribution); – matured fiscal debts and social security (RSZ) ; – extensions of invoices which are already matured; – official protests (bills of exchange) ; – withdrawal/partial withdrawal credit limits; – negative info from the banks, press, visit reports; – delay in the publication of the financial accounts (normally 9 to10 months after the closing of the financial year); – bankruptcy, concordat (ch. 11), dissolution, cessation activity; – resume activity after closing bankruptcy; – striking off/control VAT-administration Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis j) Group context: - belonging to a strong group with positive experience in the past is positive however: morality is decreasing subsidiaries aren’t supported accent more and more on analysis on a stand-alone basis k) Guarantees are only temporary - a company has to be self supporting (cash flow generative) guarantee parent=a temporary tool to transit a restructuring Date | © Copyright Euler Hermes Credit Management Credit Insurance Credit worthiness analysis Quid impact actual economic environment. The same criteria, but in a more strict and severe way. Bank crisis=liquidity crisis --- CASH=KING The financing structure (loans’ maturity; committed lines; …) Financial accounts: get them faster: - provisional accounts are necessary - interim accounts are necessary - major changes since then LIQUIDITY against SOLVENCY Date | © Copyright Euler Hermes Credit Management Credit Insurance Rating/grading: definition Definition : credit worthiness measure of the debtor, based on different criteria, which specifically allow to estimate the repayment capacity of the company/country within 1 year. Two kinds : - Companies : from 1 (=very good) to 10 (=bankruptcy) - Countries : from AA to D (6 gradations). How? - Automatically : need of structured information. - Manually Date | © Copyright Euler Hermes Credit Management Credit Insurance Rating: credit insurance. The gradings Euler Hermes GRADE EH S&P RISK NOTATION 1 AAA AA- Exceptional 2 AA- A- Excellent 3 A- BBB Very good 4 BBB BBB- Good 5 BBB- BB- Average 6 BB- B To be followed up 7 CCC+ CCC- Mediocre 8 CCC- C High risk 9 C D Impossible to insure 10 N/A Date | © Copyright Euler Hermes Bankrupt Credit Management Credit Insurance Rating: credit insurance A. Manual grade. People call on the rules of expertise which are fixed beforehand : Business risk - Access to the financial markets - Industrial / cyclical sensitivity - Capability of the management Financial risk. - Financial capacity (B/S + P&L) - Evolution of the cash flow + debt coverage - Investment capacity - Support of the shareholders - Additional information (visits debtor; commercial references; rating) - Negative information gradings > 1 year aren’t valid anymore = renewal required Date | © Copyright Euler Hermes Credit Management Credit Insurance Rating: credit insurance B. The scoring / automatic grading Scoring : statistical method which allows the healthy companies to be separated from the failing companies by way of a mathematical formula. In other words, the scoring allows to explain the failings of the companies through some variables, which we call the predictive variables Remark: negative rating leads to a negative decision, but always manual validation (by credit insurer)! Date | © Copyright Euler Hermes Credit Management Credit Insurance Rating: credit insurance Use of the grading 1. Monitoring: accent on the weak files (cf. file review system) 2. Prospection: fix the attention to creditworthy buyers 3. Risk profile of the customer portfolio Date | © Copyright Euler Hermes Credit Management Credit Insurance Rating: credit insurance FILE REVIEW SYSTEM GRADE 01 02 03 04 05 06 07 08 09 10 Date | © Copyright Euler Hermes RCO 1 1 1 1 1 1 1 1 1 1 RC1 150 000 150 000 100 000 100 000 50 000 35 000 25 000 2 2 2 RC2 RC3 3 000 000 10 000 000 3 000 000 10 000 000 3 000 000 10 000 000 2 000 000 5 000 000 1 000 000 3 000 000 500 000 2 000 000 500 000 1 000 000 3 4 3 4 3 4 Credit Management Credit Insurance Contents 1. Impact bad payers on our company. The interest of working capital on the treasury. 2. Credit management: what are the tools at the disposal of the company to do it in an efficient way 3. Factoring 4. Credit Insurance 5. The legal environment 6. Conclusion Date | © Copyright Euler Hermes Credit Management Credit Insurance WHAT IS CREDIT INSURANCE? Definition credit insurance. Credit insurance guarantees the good development of the trade receivables which the companies have outstanding towards their domestic or foreign customers, if they have been accepted beforehand by the credit insurer. She thus covers the insolvency risk. The right on indemnity depends on the declared (bankruptcy; composition), or presumed insolvency of the debtor. Date | © Copyright Euler Hermes Credit Management Credit Insurance WHAT IS CREDIT INSURANCE? Offered services CREDIT INSURER Date | © Copyright Euler Hermes PREVENTION MONITORING RECUPERATION BUYER = DEBTOR Credit Management Credit Insurance PAYMENT INSURED = SUPPLIER = CREDITOR DELIVEY INDEMNITY BANK DISCOUNTING THREE TASKS 1. Prevention and monitoring: - Judgment solvency/creditworthiness actual and future customers of the insured. - Permanent follow-up of the covered customers. - Immediate communication by the PH of each default. 2. Collection/recuperation: Collect the trade receivables in case of (unpaid) claims: - Amicable lawsuit; - Or judicial procedure. Date | © Copyright Euler Hermes Credit Management Credit Insurance THREE TASKS 3. Indemnity: Insurance function. Official insolvency: bankruptcy, composition (WCO/LCE=law on the continuity of the companies dd. 31/1/2009) Presumed insolvency: no payment of the invoice, a certain period after the maturity date (waiting period) No commercial relationship with the debtor (buyer) which could lead to frustrations ‘Code of conduct’ in Belgium (communication of the reason of negative decisions) Date | © Copyright Euler Hermes Credit Management Credit Insurance OTHER BASIC PRINCIPLES OF CREDIT INSURANCE 1.INSURANCE OF THE COMMERCIAL CREDIT RISK What is the commercial credit risk? Insolvency of the customer Private debtor A sole trader or company person which has a private law statute 2. INSURANCE OF THE GLOBAL TURNOVER OF THE COMPANY Basic reasoning: avoid that a company arranges a systematic selection of the risk, and only insures its bad risks. Date | © Copyright Euler Hermes Credit Management Credit Insurance OTHER BASIC PRINCIPLES OF CREDIT INSURANCE 3. PARTICIPATION OF THE INSURED (85 %) in the loss of the trade receivables: • term of the «good house father» and of «partnership» • No insurance at 100% 4. POSSIBILITY OF CESSION OF THE ADVANTAGE OF THE POLICY In favour of a third: Bank, factoring company... Date | © Copyright Euler Hermes Credit Management Credit Insurance ANALYSIS IN CREDIT INSURANCE CREDIT LIMIT DECISION No exact science. It’s a result of: - available information; - experience in risk U/W. Not always a complete rational reflection « Fingerspitzengefühl »!!! Credit= Credere (latin)=believe in it TRUST Date | © Copyright Euler Hermes Credit Management Credit Insurance 1. Capital 2. Immaterial fixed assets : 2. Reserve certifications, licenses 3. Retained earnings 3. Material fixed assets 4. Debts L.T. - land and buildings 5. Debts S.T. FLOATING ASSETS - plant, machinery and equipment - bank S.T. - rolling material - suppliers 4. Financial fixed assets: - fiscal debts participations, ... - salaries 5. Stocks and orders - Social 6. Receivables customers EQUITY 1. Establishment expenses (*) 7. Cash and cash equivalents: 28 % DEBTS S.T. FIXED ASSETS TARTENFLUTTE N.V. PERMANENT FORTUNE IMPORTANCE OF CREDIT INSURANCE TYPICAL B/S OF A BELGIAN COMPANY charges 6. Deferred charges - S.T. Investments - bank - cash 8. Accrued income Date | © Copyright Euler Hermes Credit Management Credit Insurance IMPORTANCE OF CREDIT INSURANCE FINANCIAL INTEREST TRADE RECEIVABLES Financial protection insured (protection trade receivables) Cash-flow of the company : - Reimbursement bank debts + supplier debts. - Payment production costs (raw material; salaries; …). - Dividend to the shareholders=increase of confidence. - Investment capacity. The P&L accounts: - Provisions. - Profit. Need of working capital. Invisible bank : (Supplier credit): Date | © Copyright Euler Hermes - de iure : insurer - de facto : between insurance and banking world Credit Management Credit Insurance IMPORTANCE OF CREDIT INSURANCE IMPACT EXCEPTIONAL LOSS ON PROFITS When : - the profit margin of the company is 2%; - the company has lost a receivable of 1 mln Euro, there has to be realized an additional turnover of 50 mln Euro to neutralize this loss. It costs additionally 5 % to find a new customer compared to keeping an existing one, but don’t take unnecessary risks. Date | © Copyright Euler Hermes Credit Management Credit Insurance IMPORTANCE OF CREDIT INSURANCE Multiplicatoreffect credit insurance: 2,3 Study Dutch Central Bank anno 2010: Every Euro of exports covered by credit insurance leads to an increase of the global trade by 2,3 Euro Increase of trade=motor economic growth!!! Date | © Copyright Euler Hermes Credit Management Credit Insurance IMPORTANCE OF CREDIT INSURANCE Trade Finance instruments (market share ad 10%) Date | © Copyright Euler Hermes Credit Management Credit Insurance IMPORTANCE OF CREDIT INSURANCE Evolution world trade compared to GDP Comparison of the world GDP with the growth of the world trade in volume (annual change, in %) World GDP World trade 2005 + 3.4 % + 7.6 % 2006 + 4.2 % + 9.0 % 2007 + 4.2 % + 7.1 % 2008 + 1.9 % + 2.5 % 2009 - 2.0 % - 12.0 % 2010 + 4.0 % + 13.7 % 2011 + 4.4 % + 5.9 % 2012 (*) + 3.3 % + 4.7 % (*) Expectations Source: Euler Hermes Date | © Copyright Euler Hermes Credit Management Credit Insurance IMPORTANCE OF CREDIT INSURANCE REAL PREMIUM CONTEXT When paying the credit insurance premium you’ve got to take into account: Credit insurance = management- and working instrument Outsourcing and support of credit management. Improvement of the B/S structure Date | © Copyright Euler Hermes Credit Management Credit Insurance GLOBALIZATION Euler Hermes worldwide: present in 49 countries America: Argentina Brazil Canada Mexico US Date | © Copyright Euler Hermes Europe + Mediterranean : Arab Emirates Belgium Denmark Germany Estonia Finland France Greece Hungary Ireland Israel Italy Latvia Lithuania Luxemburg Morocco Netherlands Norway Austria Poland Portugal Romania Russia Slovakia Spain Czech Republic UK Tunisia Switzerland Turkey Sweden Asia – Pacific Ocean: China India Indonesia Japan Malaysia New Zealand Philippines Singapore Taiwan Thailand Credit Management Vietnam Credit Insurance South-Korea Australia GLOBALIZATION The credit insurance market in the world Market shares – ICISA members QBE 1.97% Mapfre 2.45% Chartis (AIG) 2.59% Others 4.82% Credito y Caucion 8.78% Euler Hermes 35.65% Atradius 21.36% CESCE 2.74% Coface 19.64% Total market volume € 4,608 bn Date | © Copyright Euler Hermes Source : ICISA, Euler Hermes – Jan. 2008 Credit Management Credit Insurance GLOBALIZATION THE MARKET OF CREDIT INSURANCE BY REGION Credit insurance market by regions in % and Mio € direct earned premium Others: 116 ; 2.28 % Australia: 45 ; 1.1 % NAFTA (USA, Canada, Mexico): 454 ; 10.9 % Asia: 153 ; 3.7 % Europe: 3387 ; 81.5 % Source: Euler Hermes, ICISA 2003 Date | © Copyright Euler Hermes Credit Management Credit Insurance GLOBALIZATION Some key figures Euler Hermes anno 2011 : - 35 % of the credit insurance market in the world. - 2,1 billion Euro consolidated turnover. - More than 800 billion Euro covered commercial transactions. - 7 million existing credit limits. - Rating AA- with S&P. Advantages: - synergy and efficiency (scale effects) - better service - globalization Date | © Copyright Euler Hermes Credit Management Credit Insurance GLOBALIZATION POTENTIAL SYNERGIES: Risk, Information, Debt collection 1) The credit decisions are taken locally in the country where the risk emerges, according to common rules (EULER HERMES business model). efficiency and productivity gains 2) Development of proprietary information (besides the bought info). better decisions and increase of the added value for the customers Date | © Copyright Euler Hermes Credit Management Credit Insurance GLOBALIZATION 3) Common network for debt collection higher income, lower costs 4) Reduction in the administrative tasks: common DB (IRP) heavy investment (preventive role) Date | © Copyright Euler Hermes Credit Management Credit Insurance Paul Becue: author of… First one also in French (ed. Racine Campus) Date | © Copyright Euler Hermes Credit Management Credit Insurance Thank you for your attention. Credit Management Credit Insurance