THE IMPORTANCE OF BUSINESS PLANNING FOR ACCESS TO CREDIT

THE IMPORTANCE OF BUSINESS PLANNING FOR ACCESS TO CREDIT

CURRENT BACKGROUND SCENARIO

The European Banking Authority as of July 2022 has revised its regulations and guidelines regarding the provision of loans and the subsequent assessment of customers' creditworthiness, consequently requiring banks to change their perspective by no longer relying solely on historical data but by resorting to a large extent to prospective data, provided by documentation that is certain and from which the firm's ability, both present and future, to meet its contractual obligations to repay the loans it has taken out can be credibly appreciated.


REDUCTION IN FIRMS' INVESTMENT CAPACITY

The year 2023 will be characterized by an aggravation in terms of costs that will severely impact the heart of Italy's productive sector consisting mainly of SMEs: with an inflation rate of 8.8 percent recorded in 2022 and similar forecasts for 2023 as well, there will be higher operating costs due to higher energy and raw material prices, which will generate lower sales revenues also due to the general worsening of consumer spending capacity in the economy with a consequent reduction in consumption and gradual increase in the propensity to save; in addition, an increase in interest rates and related debt burden is expected, for example, the Euribor has risen in a few months from - 0.50 percent to more than 2 percent, components that will definitely negatively impact credit quality and a potential deterioration of it.


SME CHALLENGES

Despite the continuation of this adverse situation, Italian SMEs are being called upon to successfully sustain a major period of change, from green to digital transition: a radical transformation of classical business methods and operations will be created, with the intention of digitizing production systems and achieving increasingly sustainable productivity and mobility.

In addition, the need for SMEs to positively approach a sustainable transition path is also linked to regulatory elements in reporting, CSRD Corporate Sustainability Reporting Directive, which from 2024 will involve more and more companies from year to year: there will exist gradually increasing obligations such as those for listed SMEs to report non-financial information and for smaller companies to collect ESG, Environmental Social Governance, data referring to the entire value chain of productivity and their suppliers.

Such data will be indirectly required by banks, as significant importance will be attached to ESG factors for lending purposes, and will also assume a key role in participation in public contribution calls, such as those related to the NRP, just as increasing attention will be given to sustainable products and services by potential investors.

As a result, due to the progressive reduction in the ability to spend and possibility of using own resources and cash resources, it is even more important to obtain bank credit, whether it is guaranteed, linked to government calls or granted through leasing: the key aspect that should be emphasized here is the one related to the importance of such credit and consequently to the bank-firm relationship.


IMPORTANCE OF PLANNING

In order for this to happen and for there to be easy access to credit, Italian SMEs must begin to progressively change their corporate governance system and adopt stable forward-looking planning, foreseeing and outlining future business developments, adapting their management choices in order to be ready to respond to more stringent requests received from lending institutions, thus overcoming the exclusive accounting logic linked to mere business continuity.

THE ROLE OF THE ACCOUNTANT

Business planning, to be compliant even from a banking point of view, must provide with extreme clarity, the following:

  • the cash flow that the company will be able to generate year by year, over the given time horizon, as the current focus is no longer on past performance but on future performance (i.e., how much you will be able to earn to ensure debt repayment);
  • the management of medium- to long-term debt;
  • the determination of the DSCR, Debt Service Coverage Ratio, i.e., the debt coverage ratio, measured between the annual cash flow that the company generates and the annual share of medium/long-term debt to be repaid (its optimal value should be above 1.3 so you should, for example, generate at least € 1,300 of cash flow to repay € 1,000 of debt).

For this reason, the figure of the Chartered Accountant who has always been alongside SMEs will have to take on more of the aspect of a strategic advisor who can facilitate this transition and improve business planning, positively guiding management's strategic choices and taking care of the management of the bank-firm relationship.

In addition to the balance sheet analysis, a document that is still fundamental in the analysis of creditworthiness, the professional to facilitate what has been said so far will be able to:

  • draw up company business plans or prospective business plans,
  • create reports highlighting or not highlighting the prospective sustainability of debt;
  • correctly estimate the DSCR;
  • put in place actions in order to improve the corporate rating, which would save money in terms of lower interest on loans;
  • carry out simulations on the impact of the change in interest on existing loans and the taking out of any new loans;
  • initiate a process of restructuring the level of medium/long-term debt;
  • Progressively implement the following strategic corporate control documents, such as
    • the balanced scorecard, a support tool in the strategic management of the company that allows the company's mission and strategy to be translated into a coherent set of performance measures, facilitating their measurability,
    • the 6-12 month treasury budget,
    • the 6-12 month financial budget,
    • the monthly specific budgets,
    • periodic analyses of any corrective actions to be implemented.

 

Edited by: Luigi Alfredo Carunchio, Chartered Accountant and Statutory Auditor

You can download the article in PDF here

For more information:

luigicarunchio@valoreassociati.it

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