How CredAssist works

Firstly, and most importantly, CREDASSIST does NOT make decisions. It simply ASSISTS the credit analyst in making a decision based on deep analysis of financial information and exposing risk factors based on TRENDS and GAPS in the financial ratios used in the analysis.

CREDASSIST takes the financial information of a business and calculates the key financial ratios used to determine the critical success factors for survival of that business. It then analyses the TRENDS of the ratios and the GAPS between the ratios and compares these to thousands of different scenarios to provide a succinct but complete analysis of potential financial risks in relation to these different scenarios.

The analysis is based on the concept that no matter what type of business is being analysed, butcher, baker or candlestick maker, every single business needs to have certain critical success factors in place in order to succeed financially. While each business might succeed with very different numbers, they must ALL comply with these success factors to survive. CREDASSIST looks at each individual business and analyses how they comply with these factors:

1. Choose the right financial ratios

So, the first task is to ensure that every ratio used to analyse the business will relate directly to these critical success factors for survival. These factors are:

LIQUIDITY
CASH FLOW
FINANCIAL LEVERAGE (GEARING)
PROFITABILITY
ACTIVITY

Note that a critical factor means that all five of the above need to show survivability and weakness in any one factor is a serious cause for concern. Once the analyst is aware of weaknesses in the above factors, they are able to mitigate the risk to make the deal bankable, or, if necessary, decline the request for funding.

2. Analyse correctly

1. Choose the right financial ratios

Our experience from training thousands of analysts in the Banking Industry over two decades is that very few can analyse financial ratios correctly. There is little understanding of the difference between Liquidity and Cash Flow, for example, with many thinking these two relate to the same thing.

We need to understand exactly what these ratios tell us not only about what has already happened in the business, but also what potentially could happen in the future based on the historic trends and gaps in the ratios.

CREDASSIST is like having an expert analyst at your fingertips for virtually instantaneous assessments. Each analysis digs deep into the trends and gaps and is based on a thorough understanding of the financial ratios used.

3. Lend to the future not the past

1. Choose the right financial ratios

3. Lend to the future not the past

This is by far the most difficult part of credit risk assessment and very few people know how to do this correctly. By its very nature, ratio analysis looks at historical information and calculates historical trends and gaps.

The expert analyst needs to be able to use this historical fact to project where the business is going in the future. While Cash Flow Projections and budgets can give an idea of the future, these are all simply opinions and cannot be relied on for lending decisions.

CREDASSIST not only analyses historical information and, by using thousands of different scenarios, predicts future risk issues, it also uses forward looking ratios such as the Sustainable Growth Rate and Interest to Interest Bearing Debt to understand future potential business failure.

4. Prepare scenarios

3. Lend to the future not the past

A financial ratio in isolation cannot give much information regarding risk. Even the trend of a ratio is not sufficient.

The expert analyst will compare ratios with others and look for gaps in the trends as well as comparing trends in one ratio to trends in another.

CREDASSIST looks at thousands of scenarios which would cause financial strain on businesses and comments on particular trends and gaps of a business in relation to these scenarios. So, for example, the system will consider the level of external financing in relation to the owners equity and compare this trend with the ability to service debt as well as the potential for the cost of servicing increasing in the following year. Based on this scenario, a report will be generated.

5. Test vigorously

4. Prepare scenarios

6. Determine errors

The system has been vigorously tested to ensure that the Reports generated give an excellent appraisal of the financial position of the business client. There is a lot of cross referencing of the data to ensure that if incorrect data is input, these errors will be identified.

6. Determine errors

4. Prepare scenarios

6. Determine errors

In most cases, where analysts assess financial statements, they do not or are not able to identify errors in the information provided. While most businesses are audited, many are not, and it is extremely easy to window dress information to place the credit grantor at ease.

For example, many businesses provide a Cash Flow Statements highlighting the Operating Cash Flows of the business over the previous year. If non-operating income was added to this figure, most analysts would not know, and accept the figure provided by the client. Because cash flow is so important in financial statement analysis, CREDASSIST draws up its own Cash Flow Statement based on the information provided in the Statement of Comprehensive Income and Statement of Financial Position.

Other errors uncovered by CREDASSIST relate to Retained Earnings actually not retained in the business, dividends not disclosed, balance sheets not actually balancing, interest expense not disclosed and many other anomalies in the financial information.

Should errors be detected, the user will be informed of these errors and asked to refer to their client for corrected figures. Clients quickly realise that they cannot pull the wool over the eyes of the analyst when these errors are exposed.

Information provided by CredAssist

Financial Ratio Analysis

All the financial ratios which assist in determining the FUTURE SURVIVAL of the business are analysed, split into the CRITICAL SUCCESS FACTORS for survival. These critical factors are:

LIQUIDITY
CASH FLOW
FINANCIAL LEVERAGE (GEARING)
PROFITABILITY
ACTIVITY

Each critical success factor is analysed in a comprehensive report to the Credit Analyst.

Graphical Representation of Trends and Gaps

For each of the financial ratios analysed, the trends and gaps between ratios are depicted graphically, showing the movement over the period under review. The system will compare two to three financial years per ratio.

Comparative Information

It is a well known fact that ratios cannot be analysed in isolation. The Credit Risk Assessment Report is based on an analysis of trends and gaps over a number of accounting periods (two or three) and then analysed on the basis of how these trends and gaps could effect the FUTURE performance of the business.

Clear Explanations of Trends and Gaps

As many users may not be highly experienced in analysing financial information, the analysis is presented in an easy to read format, with many of the outcomes explained in terms of the importance of the outcome and the effect on the business in terms of financial survival.

Colour Coded Risk Assessment

The analysis of each Critical Success Factor is colour coded to give an immediate indication of the level of risk identified. GREEN implies that the trends and gaps show no immediate risks identified, AMBER shows moderate risk and the need for some form of mitigation and RED alerts the user to substantial risk which must be mitigated if credit is going to be provided in the future. As each factor is CRITICAL, if these risks cannot be mitigated in some way, credit should not be granted.

Question for the Client

Our experience has shown that finding the right questions to ask the client is one of the most important skills of a credit analyst. To assist in this regard, after each Critical Success Factor has been analysed, a list of questions is provided to assist the analyst in communicating with their client. The questions relate directly to the risks identified in the analysis.

Errors in the Financial Statements

Virtually no analyst would check all the figures in the financial statements for accuracy. The Statement of Financial Position might balance on paper, but the individual items don’t add up. Non-operating income is included in Net Operating Cash Flow and Retained Earnings are actually not retained.

In preparing the Report, CREDASSIST checks on all these and other areas where mistakes often occur and where such mistakes are identified, the user will be notified and asked to refer back to their client to correct.

Once clients see that these types of errors are not going unnoticed, they will refrain from window dressing with the knowledge that this will be identified by the system. This increases the respect the client has for the credit provider in future business transactions.

Full Cash Flow Statement

Because cash flows are so important to financial survival, it is critical that the analyst can rely on the figures provided in the Cash Flow Statement, especially with regard to Net Operating Cash Flow.

Unfortunately, it is quite easy to manipulate these figures and it would be very difficult for the analyst to pick up on such manipulation.

Another concern is that many businesses do not provide a Cash Flow Statement in the Annual Financial Statements. CREDASSIST will generate a Cash Flow Statement ensuring that only operating cash flow is included. This will assist the analyst in understanding exactly where all the cash generated in the year under review was used in terms of OPERATING ACTIVITIES, INVESTING ACTIVITIEs and FINANCE ACTIVITIES.

The Operating Cash Flow determined by the system will be used to calculate and analyse all the Cash Flow Ratios, and NOT the Cash Flow Statement provided by the client.

EXAMPLE OF CASH FLOW STATEMENT

Comprehensive Tutorials

CREDASSIST has been designed for experienced users and assumes a general level of understanding in terms of financial risk analysis.

However, we are aware that many users may not have a strong background in some financial issues. We therefore provide back up tutorials on each and every ratio used in the financial analysis. All the user needs to do is click on the ratio being analysed and the system will provide a comprehensive tutorial on:

The relevance of the ratio in terms of future survival analysis
An explanation of the ratio
The calculation used to determine to trend
An example of how the ratio is calculated

These tutorials are designed to be brief but extremely informative.

EXAMPLE OF A TUTORIAL

Mitigation of Risk Suggestions

In each of the Critical Success Factors where certain risks are identified, the report will include suggestions on how these risks can be mitigated to make the proposal more bankable.

Risk mitigation is another critical skill for the analyst as no business is risk free, and as long as the risks identified can be reduced or removed, credit can still be provided. CREDASSIST will assist the user to find ways of mitigating the risk for the credit provider.

See exactly what you get

Feel free to view or download samples of the Reports, Cash Flow statements, and Tutorials we provide.

view Credassist deliverables