Analysing Business Risks: Market Environment

from businessbankingcoach.com

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When we analyse a business as

credit assessors, we want to

consider whether it’s sustainable

into the future……….

…………and so a vital aspect of

the business that we need to

understand is its place in the

market……….

………that is, does it

sell something that

someone actually buys

and will continue to

buy?

We call this the market

environment and here

we take a look at the

semi-external

components of the

business – those

elements that are to

some extent within the

control of the business

itself.

Let’s take a look at what

is usually considered in

this environment and

some of the questions

that an analyst might

ask;

Product(s); what products or services

does the business sell? Is there a steady

or growing demand or is demand falling

due to changes in consumer behaviour?

Is the product ecologically sound?

Is the product perishable or can it

be safely stored

for a long period?

Location;

where is the

business

situated in

relation to its

customers and

its suppliers?

Different types of businesses have

different location needs………

For example, the retail type of

business needs to be close to its

customer and in a location that

is easily accessible.

On the other

hand,

manufacturers

need to be

nearer to the

supplier of the

raw material

so that

procurement

is easier and

lower stock

levels can be

held at any

one time.

As part of your

analysis of the

business’

location,

consider also it’s

distribution

channel, i.e. how

does it get its

goods to the

customer and

how secure is

that channel?

Seasonality; the bank needs to

understand the seasonality of the

business as it will have an impact

on its working capital requirements

during the year. This can be

demonstrated by a cash flow

forecast completed by the

managers of the business.

Pipeline business; what

business is in the pipeline for

the near future? This applies

to manufacturers,

contractors and distributors

as well as some service-type

businesses but not to

retailers. The bank wants to

know that the business can

be sustained with longer-

term orders and/or contracts.

Customers; the bank would want to

know who the customers are, how

many there are, where they are

situated, and what credit terms are

offered (if any).

Especially of concern

is the relative size of

the customer as

large corporates and

government

institutions tend to

take a long time to

pay their debts and

this impacts on the client’s cash flow.

The bank also does not

want to see a small

number of customers as

this means that too

much of the client’s

business is

concentrated into a

small customer base.

There is obviously

danger here should

those customers decide

to obtain their supplies

from another company.

The location of the customer is important –

whether they are local or foreign, for example,

can affect cash flow, and can lead to other

concerns such as political and economic

changes in the customer’s country.

Suppliers; as with

the customers

element, the bank

would want to know

who the suppliers are,

how many there are,

where they are situated and what credit

terms are available (if any).

Also, it’s useful to know

whether there are any

alternative suppliers of

the necessary inputs

that the client needs to

run the business. The

bank would be

uncomfortable with only

one supplier of a key

input for the client’s product.

Competitors; obviously

the bank cannot expect

the client to know all the

competitors in the

industry but the client

should be aware of the

key ones and what their

relative strengths are.

It would be useful to

know from the client

what he or she

considers to be their

competitive advantage

relative to their main competitors.

Substitutes; these are

products/services that

are similar but not the

same……. but they are

sufficiently similar to

satisfy the needs of the

consumer.

Substitutes pose a

threat when the

switching costs are

low, when the

substitute has a

lower price or the

perceived quality and

performance of the

new product are superior.

The bank

would need to be

satisfied that the

risk of this is

reasonably low

in the client’s

industry.

Entry barriers; low entry barriers into the

industry lead to higher levels of competition.

Obviously, if the client’s industry has high

entry barriers the bank is more comfortable

about the possible threats of new entrants.

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