SME Business Analysis and due deligence.ppt

Aout SME business analysis

1. Ethiopian Institute Ethiopian Institute
of Financial Studiesof Financial Studies
Non Financial Analysis

2. Ethiopian Institute Ethiopian Institute
of Financial Studiesof Financial Studies
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AgendaAgenda
1.The Credit Process
2.Business Strategy & Targets
3.Business Market & Competition
4.Business Capability
5.Business & Financial Planning
6.Business Risk Management
Non Financial Analysis

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of Financial Studiesof Financial Studies
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The Credit ProcessThe Credit Process
Financial Analysis Non financial
Analysis
Decision Making
Assessment

4. Ethiopian Institute Ethiopian Institute
of Financial Studiesof Financial Studies
Analysing the PastAnalysing the Past
4
We turn to the past to help us understand the future;
But because we do not really understand the past either, we
get both wrong
(Frank Furedi (1992) Mythical Past, Elusive Future)

5. Ethiopian Institute Ethiopian Institute
of Financial Studiesof Financial Studies
““What are the key factors that affect the performance of an What are the key factors that affect the performance of an
SME?”SME?”
5

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of Financial Studiesof Financial Studies
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Environmental
Variables
Industry
Characteristics
Business
Characteristics
SWOT
Analysis
NON-FINANCIAL ANALYSIS
Framework for assessment of industry risk

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of Financial Studiesof Financial Studies
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Business AppraisalBusiness Appraisal
Credit Assessment
Net Worth Management Servicability
Asset Cover
Collateral?
The Business Repayment
Monitoring ?

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of Financial Studiesof Financial Studies
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a. Moody’s Rating Analysis Pyramida. Moody’s Rating Analysis Pyramid
Sectoral Industry Analysis - Global/Domestic
Regulatory Environment - Global/Domestic
Competitive Trends In Sector - Global/Domestic
Market Position
Quantitative Analysis
Financial Statements
Past Performance
Future Projections
Management
Strategic Direction
Financial Flexibility
Sovereign Macro Economic Analysis

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A key factor in any business must be the management - their skills and
techniques.
Sophisticated planning tools do help but achieve little if management do not
possess the skills to develop the business successfully.
Business Appraisal Business Appraisal

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of Financial Studiesof Financial Studies
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b. Porter’s Five Forces
Threats Of New
Entrants
Rivalry amongst
existing competitors
Bargaining
power of
Suppliers
Bargaining
power of
buyers
Threat of substitute
products and
services
Ref. Porter

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of Financial Studiesof Financial Studies
c. Business Cyclec. Business Cycle
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Cash
Demand
Production
Collection
Supply

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of Financial Studiesof Financial Studies
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d. Industry Or Product Life Cycled. Industry Or Product Life Cycle
The Product Life Cycle
Start up gaining
Market Share
mature Products
in mature Markets
declining Products
phasing out

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of Financial Studiesof Financial Studies
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e. Management Skills - SME Businessese. Management Skills - SME Businesses

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of Financial Studiesof Financial Studies
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e. Management Skills - SME Businessese. Management Skills - SME Businesses
Sales
Finance
Product /
Service
If any of the legs breaks, the whole thing will fall over!

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of Financial Studiesof Financial Studies
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Market
Growth
Market Share
?
Stars
Cash CowsDogs
Question Marks
f. Product Portfoliof. Product Portfolio

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of Financial Studiesof Financial Studies
g. Business Risk Indicatorsg. Business Risk Indicators
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Stages of the business cycleRelated balance sheet items
Cash
Supply
Production
Demand
Collection
Cash
Cash, short-term bank deposits
Raw materials
Work in progress
Finished goods, inventory
Receivables
Cash, short-term bank deposits

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of Financial Studiesof Financial Studies
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Competitive
Advantage
Superior
quality
Superior
efficiency
Superior
customer
responsiveness
Superior
innovation
h. COMPETITIVE ADVANTAGE

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of Financial Studiesof Financial Studies
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i. Porter’s Three Generic Strategies - Products and Markets - i. Porter’s Three Generic Strategies - Products and Markets -
S
T
R
A
T
E
G
I
C
T
A
R
G
E
T
STRATEGIC ADVANTAGE
Uniqueness perceived
by the customer Low cost position
Differentiation Overall cost
leadership
Focus Focus
Industry
Wide
Particular
Segment
only
Ref: Porter
Some companies compete on price
Others on quality

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of Financial Studiesof Financial Studies
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Existing Products New Products

Existing
markets



Market
Penetration

Product Development

New Markets



Market Development

Diversification

j. Ansoff Matrix – Growth Strategy

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of Financial Studiesof Financial Studies
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Existing Products New Products

Existing
markets



Market
Penetration
1

Product Development
2

New Markets





Market Development
3

Diversification
4

The further from X the more risky
4 is most risky, 2&3 =, 1 is usually least risky
X

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k. MORFAk. MORFA
Market Competition
Products
Objectives Future Plans
Profits
Sales
Cost reductions
Resources Quality of Assets
Labour
Financial Cash flow
Capital
Debts
Liquidity
Ability Management

22. Ethiopian Institute Ethiopian Institute
of Financial Studiesof Financial Studies
l. S.W.O.T. Analysisl. S.W.O.T. Analysis
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Strengths Weaknesses
Internal Analysis
Money / Funds available
Management
Labour
Plant
Premises
Inventory
Products
Marketing
Financial Systems
Internal Analysis

23. Ethiopian Institute Ethiopian Institute
of Financial Studiesof Financial Studies
l. S.W.O.T. Analysisl. S.W.O.T. Analysis
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Opportunities Threats
Industry Analysis
Existing competition
New Competitors
Bargaining power of customers
Bargaining power of suppliers
Substitute products or services
Industry Analysis

24. Ethiopian Institute Ethiopian Institute
of Financial Studiesof Financial Studies
l. S.W.O.T. Analysisl. S.W.O.T. Analysis
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External Analysis -
PESTLE
Opportunities Threats
Political Changes
Economic Changes
Social Changes
Technological Change
Legislative Changes
Environmental Changes
External Analysis – P.E.S.T.L.E.

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of Financial Studiesof Financial Studies
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Environmental
Variables
Industry
Characteristics
Business
Overview
SWOT
Analysis
•Interest Rates
•Inflation
•Unemployment
•Wage Controls
•Population Trends
•Lifestyle Changes
•Political/Government
Incentives
•Green Issues
•Relative
Attractiveness
•Profitability
•Competitive
Pressures
•Market Size
•Growth Prospects
•What Business?
•Growth Stage
•Quality Review/
Location
•Development Prospects/
Market Position
•Publicity
•Human Resources
•Financial Resources
•Strengths
•Weaknesses
•Threats
•Opportunities
NON-FINANCIAL ANALYSIS

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Non-financial AnalysisNon-financial Analysis
Visiting the Business
What is the customers experience?
How long has client been in business?
Does client use modern techniques?
Is client in full control or does client spend a long time away?
What is the depth of the management team and who is there to help ?
Are routine tasks delegated ?
Who keeps the business records ?
Review of Stocks / Buildings/ Equipment / Accounts receivable

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Transaction Risk Management Risk Management
•It is a process of identification, assessment,
management and mitigation of credit risks at
transaction level through credit analysis
•The Five “C” of Credit
•Character: A measure of reputation of a firm, its willingness to
repay and its repayment history.
•Capital:The equity contribution of owners and its ratio to debt.)
•Capacity: The ability to repay, which reflects the volatility of
earnings)
•Condition: Economic and business condition or cycle.
•Collateral: In the event of default, banks recover loans from collateral.