Risks Archives - Consilue

Business plan formulation – here’s how to write a business plan

administrator — Thu, 10 Oct 2019 06:50:27 +0000

Business plan is a document intended to check the potential of the business and the level of risk of the business idea. It is often the first step towards the realization of business ideas.

Preparing a business plan is advised to all companies regardless of their size and market presence – startups as well as established mature companies.

Business planning allows you to increase the chances of success in the market, ensure further growth and development of the company.

The purpose of preparing a business plan can vary, but most often it is related to:

Expanding the product / service portfolio
New market penetration
The launch of a new project
Reorganization and revitalization of the company
Collecting sources of financing (debt, equity, grants)

Well-prepared business plan discloses the feasibility of the business idea and foresees its success. Growth and development of business ideas also depend heavily on strategy, therefore development of the business model has to be approached carefully and in line with guidelines provided by experts.

The role of the consultant in the process of business plan preparation could be simply to provide a feedback regarding the quality of the business idea, or also to connect stakeholders such as potential customers, partners and investors, provide strategic business guidance, link technical and business knowledge and look for opportunities to develop new ideas.

It is wrong to think that a business plan in any way inhibits or restricts creativity and flexibility. It is strongly recommended solely due to the fact that prior to realization of a business idea one has to check its viability and get acquainted with the path and the obstacles that have to be overcome.

Elements of a good business plan:

Analysis of the environment
Market research
Organisation
Product/service plan
Research and development
Human resources
Timeline
Key risks and problems

Mandatory components of the business plan, connecting the above mentioned elements, refer to financial projections and scenarios of success. Together they form a realistic assessment of the business idea potential based on the business and its risks. Well prepared financial projections relate to future returns, required investments in working capital and fixed assets and the extent of non-monetary categories.

Based on the financial projections bankers and various other funds decide whether to support a business idea and thus provide sufficient sources of funding for its success.

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Importance of optimal capital structure

administrator — Mon, 19 Mar 2018 12:39:24 +0000

Impacting value through optimal capital structure

Optimal capital structure (often also referred as or optimal financing mix) is one of the basic things required for a sound business. It refers to the way how companies finance their assets, how much it costs them and what they risk with it. Generally speaking, we talk about payables financing (suppliers), debt financing (banks) and equity financing (shareholders).

Corporate finance theory often addresses financing through weighted cost of capital (WACC), signaling the minimum level of return on assets engaged for which the economic value of the company is not being destroyed. For a perfect capital mix, the WACC is the lowest and the value for shareholders is maximized.

Financing mix: Balancing debt – equity

The chart presenting WACC in relation to the D/E ratio is U-shaped. Right part of the curve (area where the D/E ratio is above the optimal levels) is much steeper than the left part, signaling the fact that being too indebted is a bad decision to make.

The risk-taking of creditors is by its nature normally limited and therefore the financing is relatively attractively charged … at least as long the company indebtedness is in the healthy zone. When the company bridges that zone, the creditors start demanding higher collateral, decreasing the days of receivables outstanding, seeking to securitize receivables with third parties and increase the prices of goods sold, increasing the interest rates for refinancing activities etc. In this phase the company is already operating on the edge, risking increased illiquidity threats.

Optimal debt level is a relative term

Interestingly, levels of a sound financial debt globally significantly varies and is very much correlated with the 1) attractiveness of the region for the investors and investment flows as well as 2) growth potential. As expected, the highest debt levels are in developed countries such as USA and Western European countries (roughly 60% D/E ratio; 7x-8x Financial obligations / EBITDA ratio), followed by the developing Latin American countries, China, African & Middle East countries (roughly 50% D/E ratio; 6x-7x Financial obligations / EBITDA ratio) and relatively poorly indebted Eastern European countries and India (roughly 40% D/E ratio; 3x-4x Financial obligations / EBITDA ratio).

Almost half of the companies globally operate without or with minimal (<10%) financial debt and from that perspective do not exploit their full value maximization potential. On the other side, the debt of larger companies is often above the industry averages, transforming the debt into the strategical competitive advantage. In this context, we sometimes also see marginal leverage buyouts (LBOs) cases, that due to the leveraged nature and long-time periods often generate some value on the debt side.

Access to the right financial resources is crucial

Financing resources are the prerequisite for the company to operate as well as grow – organically (i.e. own investments in PPE) or inorganically (i.e. through M&A). When the company is growing at a fast pace and the business is either working capital intensive or PPE investment intensive, the company needs to be able to sufficiently provide new sources of equity as well. Generally acceptable is that the more mature the company is, the easier it is to find, maintain and optimize the financial resources. Companies in the early stages of development therefore often need to seek the seed and venture capital, since their risks are simply too high for the standard and risk-averse (not risk-loving) creditors. Furthermore, also companies in the early and mid-developing phase with high growth potential often come across liquidity problems, if they are not efficiently gathering their financial resources.

Equity financing is on one side most exposed to risks, but on the other side also unlimited upwards in terms of reward, since all the potential profits go to shareholders.

To sum up things, in terms of value for shareholders, a sound mix is preferable. Liabilities (payables financing & debt financing) help the company to exploit the full potential of value generation, while equity normally serves as a buffer.

Despite the fact that most successful companies in the last decade generated their value mostly through digitalization and non-asset intensive growth, the financing structure overall is not losing on its importance. Quite opposite, the market is becoming more competitive, leaving less & less space for errors and non-optimal financing structure.

The post Importance of optimal capital structure appeared first on Consilue.

Bank specifics and value creation

administrator — Mon, 19 Mar 2018 11:32:40 +0000

Banks represent a crucial element of the modern economy. Often we read about bank specifics. What exactly is it about? How do banks operate and what kind of risks and regulation are they facing? Do the risks and regulation impact the value creation?

Generally speaking we divide banks into four groups according to the source of the bank’s income:

Net interest income is income generated as a difference between funds attracted in the form of customer deposits and debt and funds provided to customers in the form of loans such as mortgages, credit card loans, and corporate loans.
Fee and commission income is income charged for services such as transaction advisory, underwriting and placement of securities, managing investment assets, securities brokerage, and many others.
Trading income is income generated from trading financial instruments such as equity stocks, bonds, foreign exchange and exotic financial products.
Other income is income generated from wide variety of nonbanking activities, including real estate development, minority investments in industrial companies, and distribution of investment, insurance, and pension products and services for third parties.

Ideally, any activity involving financial advisory service should consider businesses and dependent value drivers separately according to the source of income.

Besides value drivers, a very good understanding of the business activities and value creation is required. In contrast to non-banks institutions, most of banks create value on both sides of the balance sheets – on the equity and liabilities side, due to the customer deposits costs that are below the market interest rate, and on the asset side, due to the value added to financial products. By definition, financial obligations carry operational meaning for banks and are not meant only as a source of financing as for non-financial companies.

One should also account for risks related. In last decade the volatility of profitability of the banking industry has increased, causing the impact on market-to-book ratios. Banks deal with interest rate risks, due to the mismatched maturities of loans and deposits. High leverage causes a bank to be highly vulnerable to even small changes in interest rates. Besides that, banks take on significant risks inherent in balance sheet items (such as proprietary trading activities) and also risks related to off-balance sheet positions (such as swaps, forward deals and options on foreign currencies or securities).

Furthermore, the way modern banks operate in the financial markets result in a general dependency on exogenous factors such as the economic cycle or trends in money, capital or real estate markets, showing up through changes in a bank’s credit losses. Financial planning and other financial advisory services thus require a thorough analysis of several parameters and forecasting future trends.

Last but not least, law and regulation is also crucial. Banks are subject to various bank-specific rules. High regulation is necessary due to specific role within the financial system, risks they face and dependency on economic cycles. Regulation is imposed at the state level and occasionally at the international level, as in the case of bank capital requirements. Six types of regulation seek to enhance the net social welfare benefits of financial intermediaries’ services: (1) safety and soundness regulation, (2) monetary policy regulation, (3) credit allocation regulation, (4) consumer protection regulation, (5) investor protection regulation, and (6) entry and chartering regulation. The regulation that significantly influences the value of a bank is capital adequacy.

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Case study: Fast company growth brings financing challenges

administrator — Thu, 25 Jan 2018 16:01:29 +0000

Pain: Financing of company growth opportunity

A mid-size wholesaler came across a business opportunity on the mature market, that would boost the company growth. The management performed some preliminary market tests first and got a very positive feedback. They were well aware that their reaction needs to be fast and sound if they want to succeed. Main specifics that significantly impacted their response were 1) net working capital intensive business and 2) relatively modest operational margins. The business opportunity is in terms of revenues 5x the current level and large portion of the growth will have to be at least temporarily financed also with debt. This was the reason why Consilue was engaged – to advise the client on the most appropriate financing mix, play its role of the independent trust-worthy intermediary and to speed up the process of gathering funds.

Addressing the pain: Growth strategy comes first

The scale of the opportunity surprised everyone in the company. Since the client had at that time relatively modest understanding of the developments that resulted in it, the project was approached more strategically. Consilue dig into the understanding of the structural changes first. The market analysis and the industry analysis pointed out significant moves on both supply & demand side. To name the most significant ones:

– opening of the market for more competitive non-EU suppliers (release of EU tariffs & quotas)

– competitors have long-term trading alliances linked to EU suppliers and are non-responsive

– concentrated industry, but very rigid competition

– tensions of clients to seek new, more flexible alternatives to intensify the competition

After in-depth financial and business analysis of the company, we figured out that the competitive advantage of the client on which the idea of the future success is based, significantly depends on the particular currency exchange rate and can therefore be of temporary nature. There were also speculations about the possible responses of dominant players which are financially much stronger and already have all the facilities needed.

Reflecting all these facts, the Consilue together with the company management prepared the financial projections (income statement, statement of financial position, cash-flow statement) under various scenarios of corporate growth development. The projections revealed the financing needs as well as most optimal financing mix and the target maturities. Based on the findings the communication and negotiation with governmental crediting institutions and commercial banks continued.

Due to the temporary nature of the competitive advantage, the client was also advised how to act after they gain their target market share in order to rather develop a long-lasting competitive advantages and thus consolidate their position on the market.

Results: Company growth financing CHECKED

The client received the funds in very short time period. Consilue supported the client in the process of funding with value-added advices. Thanks to us, the client was able to replace part of its current funding activities (factoring; non-competitive interest rate loans) with carefully selected, less risky in terms of maturities, cheaper and more tailored sources of funding.

Client’s testimonial:

We are fully equipped for our attack. We understand the background. We did not lose much time. We fully & truly believe into this opportunity. So let’s attack!

Thanks to our consultants for a great support, responsiveness and proactive thinking. Also the approach to financing is smart – we will leverage the company gradually as the business progress, we carefully chose the liability types and select the maturities in a way that related risks are minimized.

Advisor’s thought:

In cases when a company comes across such a big business opportunity and the financing needs for company growth increase so much, that it might be challenging to persuade risk-averse creditors such as banks and governmental institutions. In these cases, the key role in the process is carried by the consultant, who independently reviews the feasibility of the project, review the growth strategy and underlying risks, estimates the financing needs, determines the optimal financing mix, attributes most appropriate types of funding, maturities etc. With the help of the consultant often not only the funding is agreed faster, but also the costs of company growth financing decrease, since the future business risks are perceived as lower and funds gathering process is normally more transparent and straight-forward.

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Business valuation booster – tips & tricks that work!

administrator — Thu, 28 Sep 2017 20:37:22 +0000

Have you ever wondered how to boost your business value? Do business valuation methods seem hard to understand? Consilue business value experts gathered recommendations that may drive your business value up without knowing anything about complex business valuation techniques.

Business valuE determinants

Business value is affected by cash flows from operations, changes in net working capital, net investments, growth potential and underlying risks. Any measures improving these determinants will influence the business value.

However, not everything is in the power of companies to influence. Business worth is significantly impacted by macro factors. In this context one should understand the importance of economic climate as well as industry developments and trends. This is why timing to M&A is very important.

Hint: As consultants we often prefer to present the client the value development cycle. Business valuations in various points in time is a good reference point for them to see if they are confident with the business value at a particular time.

Prioritizing the measures – doing the right things counts

The more value the company adds to the supply chain, the more important player it is and higher its business value. For that reason, it is important to understand first the needs and requirements of key stakeholders and ways to meet them effectively and efficiently. Based on that fact, one should then be prioritizing the recommendations shared below …

Tips & tricks for higher business valuE

Step 1 to higher business value: Ensure high cash flows from operations

– Differentiate your business
– Brand your product
– Tie your clients to your products/services
– Focus on most profitable products and/or services
– Acquire the right sales & marketing techniques and grow your revenue
– Appreciate and retain your key employees
– Establish barriers to enter the market
– Gain bargaining power against other companies in the supply chain
– Exploit large prepayment discounts
– Supervise the COGS
– Enhance the productivity of employees
– Optimize interest rates and taxes

Step 2 to business value boost: Optimize your net working capital

– Establish partnership relation
– Negotiate better payment conditions
– Optimize inventories and inventory turnover

Step 3 to business value maximization: Optimize your net investments

– Be aware of consumer trends
– Choose the right timing for acquiring new technologies
– Carefully plan capital investment – make investments that will support growth
– Increase the capacities in line with demand
– Ensure that the level of investments covers the growth potential
– Optimize financing

Step 4 to business value enhancement: Enhance your future growth potential

– Innovate with business model and come up with creative strategy
– Rethink processes and stick only to those that add value to your clients
– Develop new products and services

Step 5 to high business value: Minimize the risks related

– Keep the level of indebtedness at the level of comparable companies
– Endeavor appropriate product/service mix diversification
– Disperse your sales geographically
– Gain deals of appropriate size
– Supervise the creditworthiness of clients and suppliers
– Assure the level of fixed costs as low as possible
– Inform owners extensively and on a regular basis
– Give priority to transparency

Maximizing the business value is the most important criteria there is in running your business. For that reason it is important to follow the value of your company continuously, strive to bring the value maximization goals closer to the stakeholders involved, introducing the value based management techniques and setting up the KPIs based on business value maximization principles etc.

As a rational investor, one should always keep in mind also the exit strategy. The fact is that as an owner you will not be able to run or follow the company forever, so have a plan how you plan to divest your investment from the very beginning.

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