Slide show of speech delivered to national convention of the Credit Management Association of the Philippines

1. Profitability Through Credit
Management Efficiency
Raoul Villegas

3. Achieve Efficiency Through Focus
Tune out “noise.”
Concentrate on key credit
factors.
Increase capacity of credit
pipeline.

4. Account and Portfolio Profitability
In ideal world, battle over before
the fight.

5. Account and Portfolio Profitability
You don’t lose what you don’t put in
the middle – but you don’t win
much either.

6. Account and Portfolio Profitability
Quality of
information
and analysis
wins – not the
work out.

7. Economy of Effort
Find the
right factors
to drill down.
Blunt tools
needed, not
fine ones.

8. Credit Segmentation
vs. Wholesale
Retail

9. Credit Segmentation
Trade Credit vs.
Other Credit

10. Credit Segmentation
CORPORATE…
small or Medium
business.

11. Decide What You Want
Tolerance for loss?
Tolerance for payment delay?
Win share?
Liberal vs. strict policy?

12. Decisions Begin From the Top

14. Credit Decision: Projection of Payoff

15. Credit Decision: Expected Value
Maximize P and minimize (1-P)

16. Consumer Credit Risk Factors

17. Ratio of Balances to Limits

18. Age in Months of Oldest Credit Card

19. Number of Recent Inquiries

20. Number of Discrete Card Accounts

21. Auto Loss Claims and Poor Credit

22. Homeowner Loss Claims and Poor
Credit

23. Absolute No. of Accidents and Credit

24. Poor Credit & High Loss Claims

25. Factors on Trade Credit Efficiency
Credit Policy.
Tools and
Execution.
Reporting.

26. Trade Credit = Trade Offs.

27. Tools: Activity Ratio Analysis
Average
Collection Period.
Days of
Inventory.
Days Payables
Outstanding.
Cash Conversion
Cycle.
There is more…

28. Tools: Re-cut Data in New Ways
Average
Collections
per Day.
Average
Disbursements
per Day.
Net Direct Cash
Flow Per Day.

29. Alternative Measures
Average A/R
Ave. Collections Per Day =
Days A/R Outstanding
Average A/P
Ave. Disbursements Per Day =
Days A/P Outstanding
Net Direct Cash Flow Per Day = ACPD - ADPD

30. Core Measures
Current Ratio.
Quick Ratio.
Working Capital.
Net Worth.

31. Trade Credit Reporting
Depends on what
management
wants to know.
Metrics:
quantifiable and
comparable.
Must enable
action!

32. Small Business vs. Corporate

33. Focus on Owner & Cash Flow
Most SME’s fail due to poor cash
flow planning.

34. Keys to SME Credit Evaluation
Analyze business
plan/industry.
Analyze cash flow.
Keep eye on
collateral.

35. Sober SME Credit Evaluation
Liquidity and Solvency.
Activity ratios.
Leverage ratios.
Validate, validate, validate!

36. Other Useful Metrics
Cash burn ratio.
Cash as % of
IBD.

37. Corporate Credit
Understand the business model
and the industry.
Know the accounting. Income
earned not same as revenue
collected.

38. The Most Powerful Equation in
Corporate Credit
Assets + Exp. = Liab. + Eq. + Rev.
“Assets plus
expenses equals
liabilities plus equity
plus revenues.”

39. One can determine:
Quality of revenue.
Proper matching of
expenses.
Misreported
balance sheet
valuations.
Quality of cash
flow.

40. Traditional Corporate Credit Metrics
Liquidity. Leverage.
Activity. Returns.

41. Key Corporate Credit Metrics
Working capital.
Asset turns.
Margins.
ROA and history
thereof.
Cash flow – OCF and
FCF.
Equity to liabilities.

42. Follow the Cash
Other ways out
don’t pay as
well.
Discipline in
analysis wins.
Know the odds.