Finance

Captive Finance Stability Analysis – A simple model

 

As an IT strategist/Enterprise architect in a corporate America, understanding the cash position and cash flow prediction enables to align the IT strategy to support the over all business strategy. Generally, the business strategy, cash position and cash flow position are provided to IT from controlling or corporate finance or business strategy team.

I wondered, how difficult to study survivability, sustainability, stability of a captive finance and came up with a simple model. The model is broken into sub model and the attachment provides the details on the first sub model. The sub model provides the projection of available fund, accounts payable and accounts receivables.

Please click the excel to view the raw data of the model. Please go to “Results” tab to see the projection of the account’s portfolio.  The excel can also be downloaded from google doc. (Few columns were hidden just to ensure the better reporting)

In  scenario #1, the cash and fund flow of the captive company is shown.  If the general administration cost of the company is 1% of its accounts receivable, then company is not going to sustain in next 36 months for the given initial condition (accounts payable and recivable).  The payables are increasing, receivables are decreasing and fund reaches near equilibrium (steady state). This company will not survive in long run unless the G&A is reduced significantly.

In simple words, the company is spending too much of cash in administrating the loan portfolio. Company must quickly react and for a captial investment company, the company is not attractive unless investment company is an expert in reducing and managing G&A and use this projection as a good negogiation tactics for best bargain. 

In scenario #2, the operating loss of the company is 1% of accounts receivable. There is no HOPE for the captive finance company in scenario #2. The net loss of the company is increasing expoentially. Atleast in scenario #1, there was a hope. The company will incur losses only after 12 months and it can be turned around if the company quickly react to it.

Capital Investment company should not consider the company in scenario #2. The company already bought too many bad papers and it can not be reversed.  It is unmanagable risk unless the external factors like economical growth minimizes the credit losses and residual risk. A miracle need to happen for this company in scenario #2 to survive.

In scenario #3,  the company is paying the debts  aggressively. Company is not circulating the money to offer new loans. The company has a very strong balance sheet. If the company is planning to put themself for a sale, this approach given in the scenario #3 will attract more captial investment companies. For the captial investment companies, the company sits on high equity and steady fund flow. This is a good scenario if the company decideds to shut down (or run down) the business in next 36 months and make huge profit. If you are an employee and if you work for the company in scenario #3, better you float your resume since the company will close the doors after 36 months after making huge profit. There is no investment made in this scenario #3 for growth.

In scenario #4,  the company has very low operating losses, manageble operating expenses (G&A) and has a right mix of investment and payback strategy for both future and debt holders.  The company will be making profit for next 36 months and if the trend continues, the company will be in business for long time.  If you are employee working for this company, make more retirement investment with company’s option/plan. If you are captial investment company, buy this company to thrive. This scenario is a win-win scenario for all stakeholders, investors, management, employees, debt holders.

Auto finance is almost a trilion dollar industry. I believe the companies will be interested to buy a software to study the company status in long run given current situation and various scenarios.

Please post your suggestion on developing a software for this purpose will have scope in auto finance industry market..

IT Finance Management Framework – Part 2

Understanding how the IT budget process fit into the overall corporate finance is essential to grasp the big picture.  The following figure illustrates how the IT G&A operating budget fits into the over all corporate finance.

it_ga_budget2

IT organization must decide the technique suitable for the budget cycle. To select the best suited techniques the organization must make them self familiar with the available options. Let me list the various widely used technique available to create the IT G&A operating budget.

  • Static Budget – Presents one forecast for a given time frame and does not change for budget cycle
  • Flexible Budget – Budgeted Revenue and cost are adjusted during the budget cycle
  • Incremental budget – Previous year actual are taken as the base line and added or deleted additional cost for current year
  • Zero Based budget – Begins from ground up
  • Top Down budget – Each directors are given a budget task to align to CIO budget target
  • Participatory Budget – Developed as a collaboration with all directors (generally very difficult to make it practical)

There are other budgeting technique like activity based budgeting, Kaizen budgeting and etc. Kaizen  is a type of incremental budget with cost effectiveness target are given to each directors. To make the framework complete, I understand the widely used budgeting technique must be captured and it will eventually.

For this version 0.1, I want to start with zero based budget since I like the concept. It is very practical and gives an opportunity to each director or even senior manager or manager level to challenge every activities and look for some level of business case. Zero based technique can be used if it is top down budget and budget task are given by CIO to each director. Let me start with ZBB.

Zero based budgeting must be done in the manager or team leader level and rolled up to director and CIO level.  It requires the manager or team lead to understand the business and forecast the work required to keep the systems lights on, enhancements and G&A project.

it-finance-mgmt-how-to

The cost for lights on, enhancement and projects are will be incurred by employee, contractor, purchase servie, software cost & hardware cost. Each manager or team lead under each director will forcast for lights on, enhancement and project in terms of employee, contractor, purchase service, software cost and hardware cost.

The training required to perform the forecast will be the starting session of next part of this initial IT Financial Framework.