Forward looking approach in the risk assessment of companies

How to integrate a forward looking component in the risk assessment of companies into lending and credit management processes using an automated simulation tool.

The most widespread assessment systems in the world of credit and consultancy are generally based on a traditional and static approach. The so-called ratio analysis is certainly based on some useful principles, but these do not allow the dynamic aspect of risk to be considered, thus preventing us from having a comprehensive and complete view of the counterparty.

For this reason, many credit institutions have recently intensified activities to strengthen the processes and skills related to forward-looking analysis and cash flow analysis issues, since the principles underlying Basel 3 oblige them not only to consider current risk but also expected risk.

Therefore, it isn't enough just to know the current state of health of a client company or prospect, but it is also necessary to predict likely developments. Forecast analysis of client companies must also take into account expected industry trends and the competitive positioning of the individual company within the industry itself.

In fact, a company operates within an external context whose dynamics are able to significantly influence the operating and financial results of the company; there are multiple influences deriving from the external context, which can be considered on a system level and on the level of the reference economic sector.

Lending and credit management policies, therefore, cannot ignore the assessment of the cyclical phase in which the financed company must generate cash to repay loans, and at the same time must take into account the specific characteristics of the economic sector in which it operates.

Therefore, it is necessary to approach the risk assessment of companies through:

  • ratio analysis of historical data and the standardization of economic-financial analysis policies for the purposes of assessing the company, its credit potential, and the risk and sustainability of the credit facility being offered
  • building company forecasts (business plan, complete with statement of assets and liabilities, profit and loss account, and cash flow statement) on the basis of a simulation “engine” which takes accounting reports into consideration among the main financial statement amounts and which can also be fed using assumptions formulated by the user (typically by the Manager, on the basis of interviews with the company)
  • company data projections, including in the absence of information from the user, on the basis of macroeconomic sector forecasts (industry outlook), positioning of the company within the sector (with the aim of identifying the so-called “star” companies), and any “what-if” analysis performed by the user on macroeconomic and company figures.

Fill out the form to request the full paper

PRIVACY NOTICE

According to the EU General Data Protection Regulation n. 679/2016 (GDPR), we hereby inform you that CRIF S.p.A. an Italian company with its registered offices at via Fantin, 1/3 - 40131 Bologna shall collect and process your personal data as Data Controller, also through automated means, for purpose of responding your contact request about activities and services provided by CRIF and/or by affiliated companies. This contact will be put in place via remote communication for which we ask for your consent. Your consent for these purposes is mandatory and, without it, it will be impossible for us reply to your contact request.

If you want, you can provide us your consent for purposes of sending advertising, commercial and information material (Marketing purposes) related to CRIF or to affiliated companies. In these cases, your consent is not mandatory but CRIF shall not provide you advertising, commercial and information material.

 Your personal data shall be processed fairly and with the maximum confidentiality and may be communicated to members of CRIF Group for the same purpose stated here-above.

We also inform you that, under provisions of GDPR, on the base of lawfulness of processing and of the modalities of processing, if the conditions are met, you have the following rights: access to and rectification or erasure of personal data or the restriction of processing concerning your data or to object to processing as well as the right to data portability. Furthermore, you have the right to withdraw your consent at any time, without affecting the lawfulness of processing based on consent before this withdrawal.

Your personal data will be stored by CRIF until you will decide to withdraw your consent. We inform you that you can withdraw your consent at any time by writing to the following e-mail address: consensoprivacy@crif.com.

You can lodge a complaint with supervisory authority, using the following link: http://www.garanteprivacy.it/web/guest/home/docweb/-/docweb-display/docweb/4535524.

For any questions regarding the processing of your personal data, please contact our Data Protection Officer, using the following contact details: e-mail: dirprivacy@crif.com; tel: 0514175084; pec: crif@pec.crif.com.