Posts By :

Muthukumar K

Reversal of interest rate cycle – Are you fully quantifying the credit risk?

A ship in harbour is safe, but that’s not what ships are built for. Similarly, it is next to impossible to grow a business without taking credit risks. However it’s important that risk mitigation measures are also in place lest your business succumbs to a stormy business environment.

RBI recently increased the repo rate, the rate at which commercial banks borrow money by selling securities to RBI, by 40 basis points. The annualized yield of 10-year benchmark government bond yields in turn is now at 7.2% – up by 100 basis points since Aug 2021.

The central bank usually increases interest rates whenever inflation goes above their comfort levels. A higher interest rate tends to moderate economic growth by keeping a check on demand. For one, high-interest rates increase the cost of borrowing and reduce disposable income thereby putting limits on consumer spending.

With interest rates bottoming out, and with further rate hikes expected in the future, it is important that your credit management systems are in place.

Determine sector-wise exposure

First of all, assess your customer’s sensitivity to interest rate shocks. One of the ways to do this is by classifying them into industries they belong to.

Banking and finance, auto, real estate, consumer durables, capital goods and allied sectors tend to get more affected by a rate hike than the others. For instance, an increase in interest rates (which is usually linked to repo rate) for a house or car loan affects the affordability factor. Instead of paying higher EMI, potential customers might prefer waiting on the sidelines. This in turn could affect the businesses/finances of residential property builders and auto manufacturers and their ability to make payments to you on time. So, find out how much percentage of revenues comes from these vulnerable sectors?

Promptly, red-flag customers in these sectors with a history of late payments, legal issues and bankruptcy.  Review their credit policies periodically and if need be, move towards a 100% prepayment model to avoid potential bad debts.

Analyze creditworthiness

A company might operate in an interest-rate sensitive sector but still exude financial prowess. So, have a look at company’s financials to get a glimpse of its indebtedness and liquidity situations.

In a rising interest rate scenario, the profitability of debt-ridden (leveraged) companies takes a hit in two ways – one by way of drop-in company sales from reduced consumer demand and two, from its higher financial costs.

However, cash-rich companies or those with zero debt on their books are on a relatively better footing.

Moreover, while analyzing the financials, look at the business and financial risk profiles of the company and its subsidiaries as well. A high degree of operational and management integration, common promoters, and shared brand equity makes the consolidated performance more relevant.

Similarly, figure out if the customer is part of a big industrial group with deep financial pockets? If yes, they usually tend to have the financial backing of its parent to wade through tough times.

One way to keep yourself updated about the financial status of a customer is by actively tracking ratings of its debt papers as well as their updates.

Step-up data intelligence

Cloud-based databases often give deep and critical financial information about customers, competitors as well as industry. By leveraging such data, credit managers can easily assess creditworthiness and make informed business decisions. Moreover, it is important that this data is up-to-date and relevant to facilitate quick decision-making. For instance, analyzing financial performance of customers over the long-term and across multiple business cycles could give an inkling of its resilience factor.

Takeaway

Reversal of the interest rate cycle can increase bad debts if proper credit risk management systems are not in place. Ensure you use data insights to stay ahead of the curve.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates.

 

 

 

Popular company identifiers you should know and their importance

Once a private bank was sifting its corporate client list using PAN numbers. To their surprise, they found the names of 15 clients registered under a single PAN. In effect, 15 different versions of its name had led to the client name being registered differently by the bank officials.

Company identifiers are a valuable database tool that can be strategically used by banks and corporations in various areas including CRM and risk management.

Here are some of the popular company identifiers that you should know of:

CIN

CIN or Corporate Identification Number is a 21-digit alphanumeric code that is assigned by the Registrar of Companies (ROC) to companies registered in India. It is provided to all companies including private/public limited companies, one-person companies, companies owned by the Government of India and State Government companies. However, for Limited Liability Partnerships (LLP) registered in India, a separate seven-digit identification number called the LLPIN (Limited Liability Partnership Identification Number) is given by ROC.

The 21-digit CIN is easily translatable and helps in finding basic information about the company. Moreover, any change in listing status, location or industry of operation and you get a whiff of it from its CIN status.

GSTIN

GSTIN is an abbreviated form of Goods and Services Tax Identification Number that is allotted by GST Network after applying for the GST registration.

GST is a destination-based indirect tax levied on the supply of goods and services. So, a company operating in two or more states applies for a separate 15-digit GSTIN number in each state. GSTIN can provide information about the business entity, date of registration, the state in which it is operating as well as the kind of business it is doing.

For instance, its 13th digit denotes the number of registrations the business entity has for business verticals in the state and under the same PAN.  So, if the business gets a GST number for its fourth business vertical in the state, its 13th digit will be 4 and so on.

PAN

A Permanent Account Number or PAN is a 10-digit alphanumeric number that contains vital information about the PAN cardholder and is arguably the most popular company identifier. For instance, an entity might have multiple GSTIN registrations due to its operations in different states or due to its operations in multiple business verticals in a single state. However, all such GSTINs will have to be compulsorily linked to the same PAN of the entity. Thus, one can use PAN to identify, for instance, the lending exposure of a bank to a single business group.

LEI

From the 1st of April 2021, this 20-digit Legal Entity Identifier or LEI is applicable for all payment transactions of value Rs 50 crore and above undertaken by entities (non-individuals) using centralized payment systems like RTGS and NEFT. All entities receiving or initiating transactions to that effect need to get the LEI number from the Legal Entity identifier India (LEIL).

TAN

Tax deduction and collection account number or TAN is a 10-digit alphanumeric identifier. It is compulsory to obtain TAN for individuals or businesses mandated by the Government to collect or deduct tax. A single entity can obtain different TANs for its various branches or divisions.

You can verify the TAN of anyone using the Income Tax Department’s website to ensure deductions for payments made to you were rightfully and legally done.

The Approach

Ministry of Corporate Affairs or MCA website gives CIN-based details, while the Income Tax website will give details about PAN and TAN. GSTIN-related company details could in turn be found on the GST government website.

Additionally, there are some cloud-based data providers that integrate all this company information and provide it in a user-friendly format. Use them as strategic tools for your business decision making.

 

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates.

 

 

 

How to analyze the financial performance of a company in a flash?

An entrepreneur wants to know the financial health of customer/suppliers in order to make informed business decisions. A manager in turn needs financial metrics to direct his team better while an investor makes it an important criterion for his investment decisions.

Financial performance analysis entails a full diagnosis of the profitability and financial soundness of a business. Basically, it involves analyzing company data available in the three financial statements – the Balance sheet, the Profit & Loss Account and the Cash-flow statement.

Turn data insights into actions  

Data from these financial statements are compiled by cloud-based company data providers in a user-friendly format. By leveraging these data, you can analyze the financial performance of a company.

Broadly, there are four categories of financial ratios to look at:

Liquidity ratio

It measures the extent of liquidity a company has to meet its debt obligations.

One of the popular measures is the current ratio – which is calculated by dividing current assets by current liabilities. The higher the ratio, the better is the company’s liquidity.

A ratio of one or more is generally acceptable; it however varies across industries. A lower current ratio than the industry average could mean you might want to review your credit/collections policies. Too high a ratio also pinpoints underutilized capital.

Solvency ratios

Solvency ratios give a peep into the long-term solvency of the company. The debt-to-equity ratio is calculated by adding all of the company’s liabilities and dividing it by shareholder’s equity.

Lower the debt-to-equity ratio better is the company’s financial health. A low ratio also gives the company the elbowroom to borrow more, if need be, to fund its growth path.

On the other hand, a company with a debt-equity ratio of more than two is considered riskier. Again, this ratio needs to be analyzed from an industrial perspective.

One challenge with only reviewing company debt is that they do not tell you anything about the company’s ability to service it. This is exactly what the interest coverage ratio aims to fix. It is calculated by dividing earnings before interest and taxes by the company’s interest expense. The higher the ratio, the more poised it is to repay its debts while a ratio below one indicates a precarious financial position.

Efficiency ratios

It measures the company’s ability to use its assets to generate income. The inventory turnover ratio indicates how long it takes for inventory to be sold and replaced during the year. The longer the stock sits on company shelves, the more are its costs.

It is calculated by dividing the cost of goods sold by the average inventory for a period. Similarly, account receivable turnover tells how often it is collected and paid.

Accounts payable turnover: Measures how fast you pay off your creditors

Total asset turnover: Showcases how well you use your assets to generate revenue

Profitability ratios

Popular profitability ratios are

Net profit margin – How much a company earns after taxes relative to its sales? A company with a higher net profit margin than its peers is usually more efficient and dynamic.

Operating profit margin – How efficiently a company generates profit from its core operations before paying its interest and taxes?

Return on Equity indicates how much are shareholders earning on their investments. It is calculated by dividing Profit After Tax by the shareholder’s equity.

Return on Assets (ROA) specifies how well the management is utilizing the company’s resources or assets. Capital-intensive industries usually tend to have low ROA than the service industry. It is calculated by dividing net profit by average total assets.

There are many more financial ratios for making advanced analysis. All need not be looked at in isolation but analyzed in conjunction to get a big picture. Time-series analysis and comparison vis-à-vis industrial benchmarks in turn could help gain deep financial insights.

 

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates

 

 

How to build a world-class credit management system for your business?

Credit makes the world go around. Without this life blood of the economic system, many businesses would cease to exist.

If a company makes a sale on credit, only when the cash is collected that the sale is considered to be final and complete.

Credit department plays an important role in managing the cash conversion cycle of companies. If the sales department is the engine of a company, then credit department are its gears and oil that make the engine work.

Here are some credit practices to stay ahead of the curve:

Detailed credit policy

Does your business have a well-articulated goal for its credit department? Is it quantifiable and measurable? For instance, reducing DSO (Days Sales Outstanding) from 100 days to below 60 days is more definitive and clear than a mere generic statement of maintaining healthy portfolio of accounts receivables.

Furthermore, who takes credit responsibilities? Some companies link the bonuses of sales departments to collectability of accounts receivables to ensure sales executives are more mindful while soliciting customers. Some others put the onus of collections on the credit manager while also empowering them solely with assessment and approval of customers.

Are there credit limits and sign-off levels throughout the organization as part of risk-mitigation measures? For instance, sign-off level could be something like this:

Credit analyst – upto Rs 50 lakh of deal value

CFO – Rs 1 cr

President – Rs 5 cr

Board of Directors – Rs 10 cr and above

By having more senior employees involved in big deals, corporate can guard against potential risks and downsides.

Actively monitor customers and competitors

Recently, a south-based textile company was losing customers in certain geography. Their research found that it was losing to a single competitor which was matching its price but also giving abnormally long credit to its customers. Financial analysis of the competitor company found it to be in a precarious financial state and that it was using these desperate measures (like liberal credit) only to stay afloat. Armed with this information, the company stayed put with its pricing and as expected the competitor later filed for bankruptcy.

Cloud-based databases often give deep and critical financial information about customers, competitors as well as industry. By leveraging such data, credit managers can easily assess their credit worthiness and make informed business decisions.

In fact, many companies internally rate their existing customers based on their payment history and financial strength. By red-flagging those with a history of late payments, legal issues and bankruptcy, they reduce potential bad debts.

Organizational Buy-in

Any business credit policy needs a buy-in across the organization (including that of sales department) for it to be successful. Are the credit goals in sync with the larger goals of the organization? For instance, the company strategy might be to boost market shares. That in turn could require going down the quality curve and hunting for some difficult customers as well.

Are the credit terms flexible enough to reach out to them with ample safeguards in place? For instance, in this case, a corresponding credit term structure might insist on full prepayment for riskier customers as against the usual Net 30 days (of credit).

Clear communication of terms and payment conditions

Send invoices as soon as the orders are fulfilled and addressed to the right person. Email invoices rather than just sending it by post and ensure it is received by them by making courtesy calls. Make payments easier by accepting different forms of payment and by clearly stating out bank details.

If there are discounts for early payment, clearly spell it out. Some software facilitates automation of the entire follow-up process.

Takeaway

By leveraging online company data services, you can get more insight into customers and industry credit practices. Capitalize on it to keep credit risk under control.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates

 

What a data-driven sales strategy can do for your business?

Successful sales professionals tend to depend on their gut feel and natural charisma to gain a competitive advantage. Is sales prowess by itself sufficient to predict or influence customer behaviour?

Not really. It also needs the support of data today. And lots of it.

The Covid 19 pandemic has changed the marketing landscape in many ways as sales meetings, demonstrations and events went digital over the past two years.

According to a recent Mckinsey report, about 80% of B2B decision-makers prefer the digital mode of buying and don’t want to return to the pre-COVID norm either.

 

A sales strategy that incorporates data insights is expected to give big pay-offs in these critical sales areas:

Lead generation and qualification   

Usually, cold calling has a low success rate in soliciting prospects. But if empowered with internal and external data, lead conversion rate could be higher.

Data are of two types. For starters, the operational data that comes from your internal CRM system – be it win rates, sales cycle length, average deal size, number of contact moments and so on. This is gathered while doing sales. Collecting and structuring CRM data can provide demographic and behavioural insights about customers. If used in conjunction with external company information that exists in many shapes and forms, a holistic sales strategy could be devised.

For instance, a sales manager found from an external company database that her existing client was also a director of a prospect company. By leveraging her network, she managed to get a foot in the door of the prospect company. Furthermore, she ensured the prospect passed the necessary test of financial strength and creditworthiness before signing the deal.

Many companies have already started using lead-scoring algorithms based on detailed and granular data sets of their prospects in an area.

Talent management

Data analysis can give insights into human traits that make winners. Integrating sales performance with other information such as HR data and customer profile can help identify talent that is high-performing.

For instance, a leading construction equipment company found its market share dipping in specific districts. Data analysis showed that sales staff with civil engineering degrees had a better success rate in these areas – especially with large clients. It used the insight to focus more on technical training for its existing workforce while also hiring more civil engineers for the region.

Maximize customer value

A data-driven strategy enables offering a more personalized sales experience. For instance, using CRM you can figure out what is the likelihood of your customer buying another product of your company. For instance, a sales manager in a bank might find that a high credit card bill outstanding has a strong correlation with taking a personal loan. This in turn could help cross-sell products to existing clients.

There is a popular sales maxim – it costs 5X more to acquire a new customer than it costs to keep a current one. A good data analysis helps predict the likelihood of customer churn and take action beforehand.

How to get started?

Capitalize on internal data resources from your website and CRM platforms. Resort to data cleaning and enrich your database with external data points from specialized company data providers. Use low-cost solutions that are ready to deploy from the cloud to get started. Once you start witnessing the benefits of data analytics, invest further in data infrastructure. Sometimes, external databases need to be seamlessly integrated with existing CRM platforms for it to be valuable to the sales force and at the right time.

Takeaway

The ability to predict and influence customer behaviour requires more than just sales prowess. It requires loads of authentic data – internal as well as external. Leveraging it in turn can give you huge pay-offs in the long run.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates