An Operational View of Collateral Audits
By James P. Martin, Cendrowski Corporate Advisors LLC
Traditional collateral audits tend to focus on financial results and analytics, which provide a point-in-time snapshot of the organisation. Trend analysis of the data might indicate how reported results have changed over time, but a more valuable perspective is explanation of why the business is performing the way it is, and how it will perform in the future; this requires an operational view.
For example, a bank performed regular collateral audits on a working capital line of credit and the results revealed no issues. Unexpectedly, the business owner requested a line increase to purchase additional inventory. Reported results indicated the current line should be adequate for production needs, so the request was disconcerting to the bank. No data in the collateral audit reports could explain the underlying reason for the request. Analysis of the company’s operations revealed the owner had begun purchasing increasing levels of inventory to hold, rather than to place in immediate production, which had consumed the existing line of credit. Other items to consider in an operational assessment include the capability of the staff and any staffng changes, changes in IT systems or vendors, changes in the product or customer mix, and changes in the overall business environment. Issues may also be caused by a change in relationship, including software interface, with a major customer or supplier.
In the example above, the owner was advised to liquidate the slowmoving inventory, and the bank modified the terms to exclude aged inventory from the borrowing base. The operational view is critical to allow the lender to determine the disposition of the account. Should they pull the line? Should the lending parameters be modified? Should a forbearance agreement be executed? The operational view should provide insights into the underlying issues facing the organisation, as well as recommendations to help guide the development of future action plans.
James P. MartinGGI member firm
Cendrowski Corporate Advisors LLC
Advisory, Corporate Finance, Fiduciary and Estate Planning, Tax
Bloomfield Hills, MI, USA
T: +1 248 540 5760
Located in Bloomfield Hills, Michigan and Chicago, Illinois, Cendrowski Corporate Advisors provide specialised professional services to clients internationally. With expertise in tax planning and family office advisory services, they also specialise in business valuation, risk management, dispute advisory including economic damages analyses, fraud investigations, and forensic accounting services.
James P. Martin specialises in providing comprehensive risk assessments, focusing on the evaluation of operating effectiveness of business processes, internal control structures, and the development of recommendations for improvement. Jim has examined numerous business arrangements to determine the accuracy of recorded transactions and financial statement presentations, including fraud investigation and forensic accounting services.
Publsihed: Debt Collection, Restructuring & Insolvency Newsletter, No. 12, Spring 2020 l Photo: XtravaganT - stock.adobe.com