7 key considerations facing ABL audit teams
In many ways, and in spite of the COVID-19 related challenges facing businesses, risk management remains unchanged for asset based lenders.
Prospective clients in search of financial support still need surveying. Existing clients must still be routinely audited as part of lenders’ due diligence. And some will require closer scrutiny from time to time.
The assessments and assumptions being made on an audit or survey remain unchanged too.
We still need to assess the short, medium and long-term viability of a business, how robust their paper trail is, the strength and spread of their customers and how collectable the ledger would be in the event the business fails.
The key difference is that the pandemic and measures imposed by the government must be considered at every stage, and are making otherwise strong businesses look risky (and occasionally making some weaker businesses look strong, if only temporarily).
So what are the key things lenders need to be mindful of whilst appraising new and existing clients?
1. Some trends are worthless
Comparing trends over time may no longer be appropriate for many businesses. The landscape has been altered so quickly – and so starkly – that recent data is unlikely to bear any resemblance to that 3, 6 or 12 months ago. As such, judging seasonality and predicting future sales has become incredibly difficult. So while trends remain an important indicator, particularly in assessing the strength of a business before the pandemic hit, insight into how the business is faring now on a weekly, if not, daily basis will be much more important.
2. Seasonality
For businesses that experience seasonal trade, how is the current pandemic affecting them and their cash flow? Is it creating a short-term spike or lull, and how will this impact the business later in the year? Have they been able to invest in stock to sell in the future, or might the knock-on effects be much wider than it appears to be at present? And, although much harder to predict, are their sales likely to be affected by a long-term dip in consumer and business confidence?
3. Funding of e-commerce sales
As some businesses are able to utilise their online presence to keep sales going, how will this impact on their funding requirements given, generally, these types of sales would be non-funded? The lack of visibility on these sales may actually hinder any meaningful analysis. On inventory facilities, is the inventory being eroded but no matching receivable seen? How does this variation in sales channel impact on any assumptions made in the appraisal? You may also be being asked to fund greater inventory levels to meet this increased online demand. If and when we return to normal, is that inventory still going to be sellable if that new demand falls away as quickly as it arrived?
4. Supply chain
Have any increased costs in the supply chain been fully taken into account within inventory appraisals and trade facilities? Do extended lead times or delays require longer funding periods for the trade cycle, and are customers wanting increased discounts to take goods that potentially cannot be sold elsewhere and for them to part with their cash?
5. Audit cycles
Given how much businesses are being affected and how rapidly things are changing, from the restrictions being imposed by government to the measures they’re taking to support companies, lenders should be actively reviewing their audit cycles. In an ideal world, how regularly would you be auditing your existing clients or reviewing their ledger? How does this compare to what your audit diary and current resourcing levels enable you to achieve? Are you prioritising the most at risk clients, and do you have the headroom to audit them before it’s too late?
6. Remember every sector is different
Each sector has its own nuances and poses different risks to lenders. So ensure that your audit process adapts to each sector, using past experiences and lessons learnt to shape your audit report templates and impact your lending decisions. Even within different sectors some companies will be thriving where others are struggling, so it’s never been more important to assess each business on its own merits and with an open mind.
7. Viability
This is the hardest consideration of all. By this, we don’t just mean how long the business might be able to survive should conditions remain the same, but also whether any long-term damage has been done even if things were to return to normal imminently. An improvement in trading conditions doesn’t mean everything will go back to how it was before. Will businesses be able to restock in time for a potential uplift in demand, and have they made redundancies and major cutbacks that might impact their ability to trade out of the downturn?
Clearly there is a huge amount that is still unknown, which is making the role of an auditor about as challenging as we can remember, even taking into account the recent recession and global financial crisis.
If you would benefit from an expert appraisal of a prospective or existing client, or you perhaps lack the resource to stay on top of your audit cycle, we are able to support our partners in all aspects of risk management.
To discuss your requirements, please contact Graham Bird on 0800 2761310, or email audits@hiltonbaird.co.uk.
