Contributions to calmly deal with the procedures
internal banking rating
In this section of the site we publish a series of documents and tools that can provide useful information to deal with the judgment of the banks that will already start using the rating tools provided for by Basel 2 this year.
As the agreement is still being prepared, the documents that we will gradually publish will take into account the innovations that will emerge as well as the scientific contributions that will become available over time.
The first consideration we want to make, however trivial it is, is that corporate finance must occupy a prominent place in the attention of entrepreneurs, whether the issue is addressed internally, or whether it is entrusted to specialist advice external to the company. In this regard, we want to underline the comment of Reiner Masera, former technical Minister, then President of Sanpaolo IMI, comment already reported in the section “what is Basel 2”.
“The diffusion of internal rating models therefore represents a far-reaching change also in the relationship between banks and companies, intervening in redefining the boundaries of the respective information and operational relations.” … “For medium and lower quality companies, the rating determined by the banks will become a strategic variable to regulate the cost and efficiency of their choices regarding the financial structure and investment financing, as well as a tool for assessing the possibility of growth and diversification. The rating may represent a useful indicator to support the definition of management objectives for management, contributing to a more efficient capital policy. ” “The strategies with which companies deal with this competitive environment cannot be financially deficient. It is necessary to seek continuous consistency between the structure of the sources and more general objectives of growth, innovation and market positioning. Corporate finance will therefore assume a a central role, often decisive when external growth opportunities are also at stake. This will probably determine a greater importance of the financial functions within companies and greater attention to the programming of resources and development processes. A fundamental step is outlined for businesses: the finance function will become as important as the commercial, organizational and technological one. “
First of all, we would like to point out the sensitive areas that must be taken into consideration during the corporate check-up, a check-up aimed at preparing the company to take the examination of the bank rating.
In summary, the main areas of attention will be the following:
• asset structure of the company; the balance sheets of many SMEs present absolutely deficient capital structures, which in no way highlight the real value of the company; not intervening in this area will be a real auto-goal; rather, it will be a question of evaluating the least onerous interventions;
• financial situation; the structure of the debt must be analyzed (short-term debt / medium / long-term debt ratio); the debt / equity ratio must be analyzed; the credit / use ratio; the plurality and type of credit institutions that entrust the company;
• economic aspects; the profitability of the company expressed in the financial statements can not only be a function of attention to tax issues …
The main role of financial planning appears in all its evidence; planning future commitments to find adequate financial coverage on time must also be an imperative for smaller companies, to avoid incurring cash strain situations which will be immediately detected by the banks.
Any choice in the financial field must be assessed with reference to the different impacts it will have on the company management as a whole.
For example: deciding whether to acquire an asset with a mortgage or with a lease is a choice that can no longer be made only in consideration of tax advantages, but the impact of this choice on the company’s asset structure and on the debt structure.
An excel sheet (free) to analyze your balance sheet
In order to read the balance sheet effectively, to understand if we are facing a good balance sheet or mediocre data, it is advisable to resort to a series of indices, that is, the relationships between predefined quantities of the balance sheet itself. The financial statement ratios tell us relatively simply and immediately if and what problems afflict a company’s accounts. Even the rating systems refined by banks in recent years make extensive use of these algorithms to arrive at the final assessment on the solvency of a company.
Euroimpresa Consulting Srl offers an analysis model, developed with an excel sheet, which starting from the entry of a reclassified balance sheet calculates over twenty balance sheet indexes grouped by area of investigation. For more information on using the sheet itself and to download it for free, click here.
Insights: The bank rating according to Basel 2.
The role of guarantees
Many users ask us if banks will still ask for guarantees; in fact, some argue that with Basel 2 banks will no longer systematically ask for personal or real guarantees, as they will have the tools to better assess the risk they assume by entrusting a company … It seems to us that these reflections are rather superficial, however, very often, those who report these phrases do not take into account the context in which they were affirmed: in many cases it is mostly a wish, which, as such, can be shared, even if they seem far from concrete experience every day. In any case, to try to clarify and define the terms of the problem rigorously, starting from what the new agreement provides, we report a paragraph dedicated to this problem taken from the guide “Basilea2: how to reduce its effects on businesses” by dr. Domenico Golonia. “Basilea2 and the treatment of guarantees”. For more information on our guide, click here.