PRECISE. PROVEN. PERFORMANCE. Accessing Capital Dublin Chamber of Commerce 1 May 2015 2015 & Beyond

PRECISE. PROVEN. PERFORMANCE.

Accessing Capital

Dublin Chamber of Commerce1 May 2015

www.moorestephensnathans.com

2015 & Beyond

Moore Stephens Structure to Presentation

1. Introduction

2. Banking and Accounting – A Brief History

3. Banking in Ireland Post 2008 – A Changed Environment & Impact on SMEs

4. Credit for SMEs – Demonstrating Capability

5. Our Service Offering

6. Conclusion



1. IntroductionMoore Stephens Nathans


About Moore Stephens Nathans General

• Ranked in top 10 accountancy practices in Ireland

• Offices in Cork & Dublin

• 10 Partners & over 120 staff

• Affiliated to Moore Stephens International

• Growing speciality in niche areas


Our New Service Banking, Strategy and Business Organisation

• New Division headed up by Pearse O’Donovan

• Why ? Bridge gap between SME and Funders

• A supply and demand issue:• SME economy has demand for credit

• Funders ready and willing to supply credit• But gaps exist – a mismatch of expectations..

• MSN can facilitate bridging these gaps.

• A role for specialists


SME SectorOverall Importance

• General definition of SME – Turnover <€50m and <250 employees

• Services/Manufacturing/Construction

• Estimated to be between 180,000 to 200,000 SMEs in Irish Economy

• Total Turnover €147Bn (€175Bn peak)

• Ongoing funding requirement of €50bn


• Credit is a vital ingredient of a functioning economy

• The SME sector is a vital component of the national economy

• Ensuring a functioning credit market for the SME sector is in everyone’s interests…

• As accountants, we believe we have a key role to play to unlock the funds that are available

• To provide a gateway…..


2. Banking and Accounting


A brief historical journey

Banking & Credit Early Origins


• The need for banking traces back to when man evolved from hunter gatherer and began to trade

• Credit was needed to fund crops and cattle

• Evidence of banking traces back to 2,000BC in Babylonia (Modern Day Iraq)

Banking & CreditMedieval Europe


• Banking made major advances in Medieval Europe

• Traders in Northern Italy, Lombards, developed more sophisticated banking structures

• Piazzas in Genoa, Venice and Florence enabled the provision of credit

• Credit was provided on benches – “banca”

• When the bench ran out of money, the bench was rotten, “banca rotta” i.e. bankrupt

Banking & CreditThe First Major Bank


• First major Bank was “Medici Bank” near Florence

• Grew sophisticated internal systems

• Expanded across borders

• Became first major multinational bank

• Brought down by its London branch

• Who decided to fund the War of the Roses

• A failure in governance and risk management of sorts…..

Banking & CreditEmergence of Accounting

• As banking evolved, so to did the need for strong financial information

• Double entry accounting also emerged in Italy in Medieval Europe. Lenders needed information to manage their risk

Luca Pacioli • Franciscan Friar • From Venice• “Father of Modern Day Accounting”

Banking & CreditSummary

What does history teach us ?

Credit has been, and always will be, a core requirement in a functioning economy

Accounting information is needed to support credit decisions

What is the problem now?

Rapid change in the environment – Boom/Bust

A call on businesses’ ability to know this environment and survive in it impacts on how credit is accessed

How can we increase awareness and ability to cope?

Back to the principles …..

Accounting – The numbers never lie.


3. Banking in Ireland Post 2008


A changed environment

Banking in Ireland Post 2008Summary

• Confidence was shattered by failures in credit risk management from pre 2008 driven by market complexity and ability to respond

• Response via three pronged approach: Capital/Regulation/Credit Management

• Primary repair to system was quantitative; recapitalisation with robust capital buffers and shock absorbers.

• Followed by regulatory codes

• But equally important are qualitative changes; changes to the way banks think about credit

• Banks have strengthened credit management operations

Banking in Ireland Post 2008External Forces: Central Bank & Basel

External regulatory influences to the credit decision

• Regulatory Capital Requirements

• Involvement of Central Bank and Regulatory Codes of Practice

• Trust

• Buffers for environmental change

Banking in Ireland Post 2008Quantitative Changes In Credit Model

• Focus on risk weighting

Credit Type AmountRisk Weight

Risk Weighted Assets

1 AAA Sovereign Treasury Security 100,000 3% 3,000

2 Residential Mortgage 100,000 25% 25,0003 SME Business Facility 100,000 75% 75,0004 Commercial Real Estate Facility 100,000 125% 125,000

Total 400,000 228,000

Banking in Ireland Post 2008Qualitative Changes In Credit Model

• Primary change relates to risk management being introduced pre 2008 but prominent in 2015

• Measure exposure in event of default • Measure probability of default • Measure loss in event of default• Measure based on remaining term of the facility

• When banks make an assessment of risk, the bank needs assurance as to how the borrower has performed, expects to perform, manages its risk, and controls finance

• Need to produce Information

Banking in Ireland Post 2008Credit Decision

Minimum Credit Criteria

Industry & Economic Risk Assessment

Clear Strategy and Clarity of Understanding

Information demands and expectations (ongoing/IBR)

Performance, Experience, Forecasting

Term, Debt Service Cover & Gearing (times Ebitda, Sec)

Business Management: Risk, Financial capability, Controls

Understanding of cash flow cycles and sensitivity analysis

Financial Covenants: Ongoing reporting and metrics which confirm the long term viability of the business

Ireland Post 2008Added Complexity in Decision Making

Credit Decision

Capital

Credit Risk

Analysis

Regulation

Ireland Post 2008SME Relevance

• Higher informational demands place pressures of the SME sector.

• It is easier for larger corporates to deliver this information.

• Larger corporates have human and monetary resources to install stronger systems of governance and reporting.

• But the resource capability of SME’s to meet these informational demands presents a challenge

• But the challenge can be addressed through support ….

Ireland Post 2008Functioning SME Economy

Financial Institutions

SME Sector

• What are risks to a functioning credit model:• Lack of supply X• Lack of demand X• Lack of information √

• No different to Italy in Medieval Times….


4. Credit for SMEs


Demonstrating capability

Demonstrating CapabilityPrinciples

• Lenders examining ‘probability of default’ must get assurance that the borrower has the ability to repay debt not only now but into the future

• SMEs must show capability to provide this assurance

• How? robust decision making processes

• Key management aspects of this are:1. Strategic management processes2. Internal financial controls3. Risk management systems4. Management information systems

Demonstrating Capability1. Strategic Management Processes

• SMEs must demonstrate ongoing viability

• “Viability” = French origin, “vie”, life

• Viable = capable of life survival

• Needs a robust business logic represented by Organisational Strategy

• Strategic Choice• Resource, Structure, Financial & other Projections• Plans, Policies, Administration and Systems• Controls and Ongoing Evaluation• Ongoing loop= Structured process to direct the SME long term and ensure viability

Demonstrating Capability2. Financial Controls

• Internal controls that govern finance

• Internal control, in broad terms, refers to the systems that the SME has to safeguard company wealth• Liquidity management• Cost Control and Budgeting• Internal Alignment• Account reconciliations (banks, suppliers, payroll)• Reporting and Tax compliance

• SMEs must demonstrate robust control environment

Demonstrating Capability3. Risk Management Systems

• Systems to identify, manage, monitor and report on risks that the SME is, or ought reasonably, expect to be exposed to

• This is not something new. SMEs intuitively have been doing this in the past. But in the past was a simpler business environment

• Now more complex systems are needed for a more complex environment

• Capable of demonstrating this capacity – ensure viability

• What are your key risk indicators and how are these reflected in how you run your business? How do you monitor and manage them?

Demonstrating Capability4. Management Information Systems

• Management information by definition must be:• Timely• Reliable • Relevant

• Not just meeting compliance requirements, but informing decision making

• Management Accounts and Rolling Cash flows

• Key Performance and Risk Indicators:• Liquidity metrics • Operational metrics• Sensitivity and Trend analysis (internal/external dynamic)

Demonstrating CapabilityStrategic Thinking – Business Logic

Environment, Industry and Internal factors

Strategy: Direction Organisation takes to meet its objectives – Business Development/Admin/Resources

Decision making managed by Projections, Planning, structure, policies, procedures and controls

Ability to adapt: Awareness of threat and change impacting Strategy

Key Organs of Organisation = Management, Risk and Financial Functions

Demonstrating CapabilityA logical flow

Financial Institutions

SME Sector

Strategy Risk Management

Financial Controls

Management Information

Control & Adaptability

This is the challenge for SMEs


5. Moore Stephens Nathans


New Banking, Strategy & Business Organisation Service

Moore Stephens NathansBanking, Strategy and Business Service

WhyResponse to demands from SME & Market Gap Recognition of emerging gulf between bankers and

businessInfrastructure of Advisory in Ireland - not an intellectual

issue but a resource issueWe need to bridge the gulfRequiring a spectrum of expertise and experience across

banking, organisational know how and accounting

Moore Stephens NathansBanking, Strategy and Business Service

Who?

Those looking for funding, those looking to turn things around, those looking to position themselves for the future. Direct or with advisors.

What? Detailed initial lending assessments based on funding requirements Assessment of strategy, finance function, risk management,

corporate governance Bespoke change management services on any or all of the above Engage with Banks and Secure funding Ongoing monitoring to ensure Covenant Management with data

room facility for client and bank Available to banks to produce enhanced IBRs.

Moore Stephens NathansThe Process

Assess Lending

need

Diagnose &

Prescribe Predict Source

Funds Monitor


6. Conclusions What is our message?


Ireland 2015Alignment

Banks

Advisors

SME

Cogs must be suitably aligned to their environment.

But environments do not stand still

And reactions lag…..

He who adapts best, wins…….

Information = oil

Conclusions Key Message

• Who is this for? Cradle to Grave Market

• MSN can partner with SMEs & Advisors

• Offering Diagnosis i.e. comprehensive preliminary assessments Prescribe i.e. address areas requiring attention &

overhaul Predict i.e. risk management Successful treatment i.e. Capital accessed Monitor i.e. ensure ongoing viability with data room

interface between MSN/Client/Bank


• Because after all

Credit has been, and always will be, a core requirement in a functioning economy

Accounting information is needed to support credit decisions

It has always been thus. What has changed in Ireland is the environment. Not the principles………

Documents

PRECISE. PROVEN. PERFORMANCE. Accessing Capital Dublin Chamber of Commerce 1 May 2015 2015 & Beyond