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Get a better credit rating 1 December 2010

As a business manager, do you feel well prepared before your interview with the bank? The Confederation of Danish Industry and the Danish Bankers Association have jointly prepared a check list with ten elements that businesses can use, for example when discussing the business's finances with the board of directors, bankers and/or auditors of the business.

The ten points focus on the areas that banks primarily consider when assessing the creditworthiness of your business. The check list is meant to allow you to act proactively and, in popular terms, ensure that you call your auditor or banker before your banker calls you.

The check list can also be used to give you and/or your board of directors an overview of the finances, liquidity and funding requirement of the business in the short and long term, suggesting ways in which your business should act in a market that has changed markedly in the last year or so. The ten points are:

  • Earnings
  • Costs
  • Competencies
  • Professional board of directors
  • Financial management
  • Liquidity
  • Funding
  • Risk management
  • Contact to banker, auditor and other advisers
  • Future prospects

1. Earnings

Does your business offer the right products and services? Are there new business opportunities?
Can increased finance costs be added to prices?
Do you know what the contribution margin is for each individual product/service? Do you know how the profit margin and contribution ratio of your business compare with those of your competitors?
Is your business present in the right export markets - in light of the crisis and changes in exchange rates?

2. Costs

Has capacity been adapted to trends in demand?
Can administration or other activities be outsourced?
Can processes be automated and digitalised?
Can costs be reduced without impairing the development of new products?

3. Competencies

Do you have an overview of the competencies required from your management team, board of directors and employees?
When was the last time management made a SWOT analysis of the business?
Do you have a plan for ensuring that employees have the right competencies at all times and are regularly upskilled? 
Do you participate in a network where you can share professional and management knowledge and/or have the opportunity of discussing the general financial situation in your line of business?
Does management need to be strengthened through, for instance, supplementary training/education or employment of middle managers?

4. Professional board of directors

Does the board of directors have the right competencies in the present situation?
Is there regular reporting to the board of directors on the finances, liquidity and funding requirements of the business?
Is the board of directors well-functioning and proactive?
If your business does not have a professional board of directors, is there anyone else you can use as a strong sounding board?

5. Financial management

Has a procedure been established for regular reporting to management?
Do you have easy access to current information about variances in revenue, costs, developments in creditor and debtor days, key figures and ratios, stocks, hours spent, etc?
Do you have a comprehensive view of where and when payments are received and made in the short term (the next few weeks) and in the long term (the coming months)? 
Is a procedure in place to ensure that invoices and reminder letters are automatically sent?


6. Liquidity

Can costs be reduced through better supplier agreements that take into account seasonal fluctuations and delivery frequency, for instance?
Is it possible to reduce the number of creditor days either by reviewing the business's own administrative routines or by renegotiating agreements with customers?
Do you have an overview of how much money your business has tied up in raw materials, work-in-process and finished goods inventories?
Can your business reduce its inventories, for instance, by selling semi-finished products and unmarketable goods at a discount?

7. Funding

Has the right balance been struck between equity and loan capital?
Do alternatives to ordinary bank financing exist? For example, can you reduce the funding requirement by using leasing and/or factoring instead of ordinary loans?
Have you considered bringing in external investors?
Have the possibilities for a company charge, a guarantee from the state-backed investment fund Vækstfonden or export credit schemes been examined?

8. Risk management

Is a procedure in place to ensure that the creditworthiness of new and old customers is regularly assessed?
Does your business follow developments in raw material prices, interest rates and exchange rates on a regular basis, and is it worthwhile for the business to hedge the foreign exchange risk?
Is the suppliers' ability to deliver assessed regularly?
Is your business's exposure to a few key customers or sectors too large?
9. Contact to banker, auditor and other advisers
Does your business enjoy a good dialogue with its banker - is there a reasonable match?
Is there a regular flow of information to the bank - also when trends are negative?
Does your business take advantage of the various services offered by the auditor, besides the audit of the business's financial statements? For example, do you use the auditor in connection with liquidity management?
Can financial management be outsourced to an auditor, or can the business ‘rent’ an accounts manager?
Does your business use the public trade and industry development system, including the regional growth centres?

10. Future prospects

How do you see your business’s possibilities in the short, medium and long term?
How vulnerable/sensitive are the business’s budgets and plans to fluctuations?
What is the worst-case scenario? If this happens, do you have a plan B?
Is your business aware of the free ‘early warning’ advisory services offered to small businesses threatened by or already in financial difficulties?
Is your business facing an ownership transfer under an estate planning procedure/a change of ownership, and are you and any future owner sufficiently prepared for this process? Do you have an exit strategy that takes care of both the change of owner and the change of management?

Moving on

If you are uncertain about one or more of these elements, it may be a good idea to take a closer look at the area, for instance, in cooperation with your auditor or another private adviser, and establish a procedure for sending regular reports to the management and the board of directors.
You should also regularly update your banker with both positive and negative information. You should focus equally on forward-looking information (new customers, suppliers, orders, competitors, etc) and backward-looking information (financial statements, budget performance, etc), so the bank always knows about your business’s development and opportunities.
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