Better ABL Monitoring From Existing Systems

This Changes Everything

Preface

Head-in-SandWe ABL folks have had our heads in the sand for far too long with respect to technology-based monitoring and business intelligence.  ABL risk reduction starts with AssetArchive as the solution to reduce fraud and improve monitoring with little additional cost.

 You can monitor ABL deals with
more Business Intelligence.

Traditional ABL has some monitoring, but not too much monitoring because of the expense associated with running an office that needs both space and people to do the extra work at some cost in cash.  Factoring companies have tended to do smaller deals with higher risk levels where the monitoring and losses are paid for in the fee structure.  Basically, ABL tends to be both a lower income and less monitoring cost model for a given loan.  However, fraud and willful misconduct risks remain even with some reporting, periodic field exam reports and Loan Officer reviews.

Flavors of ABL

Flavors

Monitoring levels in ABL will vary with the risk levels tolerated by a given Lender.  The collateral is pledged to the Lender (not owned by the lender).  High cash-flow deals with strong earnings, perhaps publically traded companies, Etc. could be Libor-2 pricing while a high growth startup company could be Prime+3 priced (maybe less / maybe more).  These differences in risk levels tend to translate to monitoring levels that are less intense for the cash-flow deal and more intense for the higher risk deals.  Some deals might get a monthly certificate balance with no cash controls and higher risk deals could include daily monitoring of sales, cash and even inventory.

The data coming in tends to be as simple as monthly aging and inventory reports to more intense levels of monitoring (for ABLs) that could include daily sales, cash or inventory reports.  None of that report-level information is compared to anything on a daily or weekly basis.  Some of the items could be selected for telephone or postal mail confirmations, typically on a random alphabetical basis covering the A-Z letters over 6-12 months.  Field examinations can be annual to every 60 days depending on the levels of risk, trust, technical and legal issues, Etc.  Financials might be spread monthly or quarterly.

Factoring-Like Details Would be Nice to see, but…

Details Below the SurfaceFactoring has more intense monitoring because the receivables are purchased and owned by the Factoring Company with replacement of the old ones that age out over 90 or 100 days or some similar structure.  The invoices are tracked from cradle to grave and that means entering the data into a system that tracks and ages each invoice and cash application.  The discount factor (thus the word Factoring) might be some percentage off of each purchased invoice (i.e., 5% for a 95% advance).  But the cost to run the system includes getting that data into the factoring tracking software, applying cash and adjustments, confirming new debtors and major balances on a recurring basis (perhaps confirming up to the advance rate of 95% of receivables), field examinations, Etc.  Income is higher, but so are the costs to run the operation for people, space and charge-offs.

ABL is simply a lower cost product to administer for people, space and charge-offs and the risks assumed by the Lender tend to be lower than that of a Factor.  We can’t see all of the detail at this price level, but we wish we could find a way to monitor more with efficiency.

On a positive note, these different financing products fund the needs of Companies and provide different price levels based on different levels of achievement for the entrepreneur, company or entity.

Cost of Not Knowing

Calculating Costs

Monitoring takes data and time and it can be costly if you start applying cash to invoices like Factoring does.  But what if you could dial it back a bit an use most of the data that you are already getting?  What if your monitoring showed you some of the risks?  What if you were alerted to the potential fraud areas or if you could confirm the risker items and not just take random stabs at it with A through Z Debtor samples?

Clearly ABLs have stayed away from tracking invoices and applying cash and confirming some A-Z items every month.  But if you look at your process of gathering agings and inventory reports, you never look at the detailed data, even if you download some of it.  Most ABL shops cannot answer the following questions:

  • Does the aging foot?
  • Does the aging age correctly?
  • Who are the new debtors each month?
  • Does the inventory report foot?
  • Does the inventory report have the correct extended cost n the Total column?
  • Are invoices reasonable amounts compared to the past?
  • Are balances reasonable amounts compared to the past?
  • Do invoices step-down to lower amounts as they age out?
  • Can I confirm riskier invoices and balances?
  • Can I find fraud and willful misconduct between audits?
  • What are the trends of the Borrower Concentrations over time?
  • What are the trends of the Borrower ineligibles over time?

The I don’t know answers are caused by a lack of detailed data and getting only the AR, AP and Inventory reports but not using the data in them because of the costs to do that.

“We’re an ABL shop, not a factoring shop and
the costs are too high to monitor that way!”

This is no longer true and a poor excuse to continue the old way.

But… What if you could monitor more like a factor and not have to pay for the staff, space and data management?  What if the data analytics were less expensive than more staff and charge-offs?

THAT WOULD CHANGE EVERYTHING!

The Missing thing is Using Data

Missing PieceMost ABL shops are downloading agings somehow so that they can calculate ineligibles, get concentrations, and simply be more efficient.  The smarter Lenders use our software AssetReader to get the data converted from reports and setup highly detailed ineligibles, foot reports, group credit memos, import addresses, Etc.  But here is the kicker… with that data now imported, we can archive it and do data analytics to help you monitor a loan efficiently and with little effort.  This is a systematic approach to using the same data that you are already uploading to save time, but now your monitoring is on steroids.

Get More…

Analytics

Confirmations

More means… That bullet list noted above becomes I do know for all items!

  • An optional Confirmation module lets you use custom confirmation letters for each Borrower and the items pulled are risk based, not just random.  You can also execute confirmations by email, fax, phone or call logs while gathering updated contact information for enhanced confirmation delivery methods over time.
  • Hot-Spot reports of new risks are presented
  • Metrics can be set as circuit breakers for large variations
  • More analytics without the staff, space or time and at little cost
  • Reduced charge-offs (what’s that worth?)
  • Integrate ABL specific credit reports (coming soon)

Is the Solution Costly? (no)

What’s the cost?  Our download software AssetReader already sets the standard for downloading data in ABL specific reports and helps to keep the back-office and audit process efficient.  Adding AssetArchive and the optional confirmation module is pocket change compared to any loss and the enhanced insights are going to improve loan monitoring and efficiencies.  This level of business intelligence for ABL is clos to factoring, but without the cost of space and people to run it.  A huge leap forward for ABL and you can keep your current Loan Monitoring System too!

Knowing Sooner is Better

Enhanced monitoring techniques that use data and business intelligence will help Lenders spot problems and mitigate adverse conditions sooner.  That means shutting-down abusive Borrower practices, focusing on risk-based confirmations, reducing losses and making higher profits.  It will also let you spot the problems sooner and not later, giving Lenders a chance to get rid of the junk before it blows up.

AssetArchive Changes Everything

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THE Guide to Selecting an Outsource Field Examination Firm

Shhhhhh, it’s a secret…

We Get This Question A Lot:

NOTE:  We’re a software and training company, not an accounting firm or field examination provider.  I started in ABL in 1985 and have over 19 years of hands-on field exam experience.

It seems like I can guess the question when someone that I don’t know contacts me about hiring an outside field examination company.  “Can you recommend anyone.”  Basically the answer is “No.”  For legal reasons, I will not recommend any one person or firm and you need to compare your needs to the experience of the firm, the staff experience, availability, travel needs, travel cost, hourly cost of the firm, and more (a.k.a. All Other / Etc.).  I do recommend interviewing at least Five (5) firms.

But then the conversation turns to the more important questions.  I know they don’t just need a breathing person to show up in living condition.  They know that too and that is where the conversation goes in the right direction.

What You Should Be Asking in The Interview:

Maybe you need a field examination NOW or maybe you need an inventory standard cost expert or maybe a specialist in gold or jewelry.   You can find them on the web and we have a link to a list of examiners at the bottom of this Blog article too.

Measuring expectations for ABL Field Examinations

Key Points for ABL Outsource And Key Questions:

1.  What is your ABL Expertise?

This can be a specialist firm or a division of an Accounting or consulting firm that has specialists that have years of ABL experience.  You should be able to get:

a. Background data on the principals that shows an ABL focus.
b. Staff size that are ABL specific (not necessarily the whole firm)
c.  Education levels such as college degrees and certifications of the staff such as CPA, CFE, CIA.
d. Have some or all of the Examiners worked in the ABL field for Lenders?

2.  Do you have any Specific Industry Experience Focus?

You might not need this, but then again, you might need someone that specializes in retail or manufacturing or healthcare or car dealers, Etc. and not Oil and Gas industries.  It is common to find ABL field exam providers that specialize in manufacturing and distribution, it is indeed most of the industry.  But if you need examiners with extensive experience in a given area, it is worth finding the right firm or even the right examiner at a firm.

3.  Do you Download Data?

This is the most NOT asked question.  Most Borrowers have years of data (1GB hard drives were available in late 1995 and the software was caught up for the Year 2000 conversions).  The more progressive and savvy examiners download data.  It saves a lot of time, it verifies numberical accuracy and it assists with ongoing reporting to the Lender.

This is not an Excel answer, this is data specific software to get into the poorly formatted Excel files, PDF files, Word-DOC files, Etc. that come along.  This is software that can calculate ineligible collateral and take single column ledgers and break-out the debits and credits by transaction code immediately.  Firms that lack this technology are behind the times and are taking more time to do the exams.   You are looking for products like AssetReader (yeah, we own that company).  Downloading data saves the Borrower time and money, it is a competitive advantage in cost for both the Lender and the Examination firm.

Download ABL Data
a.  What products do you use to download data with?
b.  Do you use AssetReader?
c.  What percent of your staff is using data download software?
d.  Has your staff been trained on the use of the data download software?
e.  What is the likelihood that the examiners on my Loans will be using data download software?

“If you’re not using Data Download software,
then you must be paid by the hour” 

4.  What is your Turn-Around Time once the Exam Fieldwork is Done?

It sounds easy, but there are some one and two person field exam providers that are booked-up week after week and there can be delays.  Trust me, I was one of them and I used to do the writeup work into the AM hours to get ready for the next one.  If you have a time sensitive expectation, you’ll need to find a provider with the right mix of work and work-ethic.

5.  What Kind of Recommendations Might You Make for Collateral?

These reports are not appraisals, but the ineligible collateral should be documented so that the formula and details can be integrated into the leder’s Borrowing Base Certificate (BBC) and tracking.  This discussion might reveal that the firm has no clue at all what a Borrowing Base certificate is or contains.

Other Questions:

1.  What are your hourly rates?

No rates stated here, it varies across the world.  I have seen some rates that are [perhaps] unbelievably high for specialists in certain industries.

2.  What are your travel expense policies?

It is rare to fly first class or stay at  star hotels.

3.  What geographical areas do you have covered with ABL specific examiners?

Travel can be expensive and add time to the process.  I once spent 1.5 days getting to Idaho and due to mechanical problems with the airplane, two days to get home.

4.  Do you have security policies in place and in use for file encryption on laptops and Servers?

This is simple to implement and an encrypted drive cannot be read without your super-long upper and lower case letters and symbols password.

5.  Do you do background checks on your employees when hiring?

It is not expensive to do this and it adds credibility to the firm doing the work.

6.  Do you have in-house W-2 employees do the work or do you outsource (1099 subcontractors)?

Some people prefer employees and some don’t care.  Some lenders have policies about third-party vendors being used by a primary contractor.

 

Color_Red_X_Icons_Fotolia_20850416_XS  What Not To Ask:

The most common question from a small bank that does not do ABL work on a regular basis is “How long will it take?” or “How much will it cost?”  The truth is that you can run into the following scenarios:

1.  Multiple Divisions:

The transaction seems to be one company, but it is actually several divisions in several places and with several different accounting systems.

2.  Bad Books

The transaction is a single company, but they have not closed their books in years

3.  Some Bad Combination of Factors

Some combination of the above

There are some small ABL field exams that I have done that took one field day to do the AR and Inventory count with another day for the writeup.  But then a similar sized transaction with bad books and records and uncooperative management, people that are not available for explanations and other avoidance behaviors that have caused the time to go to four days.  And that’s for just one division.    Your mileage may vary, but we cover field examination planning in some of the ABLTrain Seminars.

 

A Huge List of ABL Examiners to Get You Started:

Visit ABLPage  ABLTrain Icon

Copyright © 2014 Clear Choice Seminars, Inc.  All Rights Reserved

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Have You Hugged Your Receivable Aging Lately?

Receivable Ledgers BBC

Borrowers put all sorts of things in their agings. Overpayments, invoices, finance charges, debit memos, adjustments, freight adjustments, tax adjustments, Etc.  All of that works great, it sits there and it looks to be a mess at times, but at least it is all there. But are the offsets all there?

Like a Teenager:

If you have ever tried to raise a teenager, they find the sneakiest ways to get that phone or MP3 player while they are supposed to be sleeping or they sneak cookies into their rooms. I think that Borrowers sometimes behave that way too. We Asset Based Lenders do some due diligence like audits and we have reporting requirements too.  Borrower can observe the systematic flaws in our work a learn to avoid some of our behavior in the future.  They can sneak those ineligible adjustment items out of the aging.

My favorite is probably unapplied cash (that includes overpayments). These items should reduce the AR balance. Some of the credits are over 90 and some are under 90 on your Borrowing Base Certificate (BBC).  But they reduce the collateral and maybe the Borrower sees that as “bad” for the BBC collateral amounts?

Sooooooooo, they might reclassify these items into an “Accrued Liability” account labeled as “Accrued Deposits” or maybe they call it something similar or obtuse like “Deferred Revenues.”  But now it’s not in the aging. Is that bad?

Where Did The Offsets Go?:

The teenager (OK Borrower) took them from the aging and reclassified these things to some accrued liability account.  “They were there a minute ago, I saw them in the aging last month.”  Hmmmmmm?

Accounting Mumbo-Jumbo:

There are some accounting principles to consider here, but only one rings true:

The All Inclusive Principle – This was related to income and that it was better to include all income items on the financials. Taken to receivables, then all of the adjustments to revenues would also hit receivables (credit revenues and debit receivables to book the sale, do the opposite for reversals). This idea is a stretch to apply to receivables, but it has a little bit of merit to at least think about.

Liabilities – They are owed and can be booked when incurred.  We have an overpayment or a deposit, so that must be a liability to perform a future service or deliver a product in the future right?  Accountants are not supposed to offset liabilities and assets, they should be separate like the popcorn in those giant Christmas tins right? Cool thinking, but not exactly true because….

Substance Over Form – This is one of the Grand Daddy statements in accounting.  A unifying concept, the “Prime Directive” of accounting for you Trekkies.  This one trumps the above. The “substance” of overpayments and deposits is that they will go against receivables. So while they could be considered as liabilities in “form,” they are really related to receivables in “substance.”  See, you can bang a liability against an asset and take the net in this case because Substance trumps form.  Also note that this is generally accepted accounting practice in the real world because people account for this stuff in the AR accounts and the AR module of the accounting systems.

So Can You Hug Your Aging?

If accounts receivable were my collateral and on my BBC, I would want to have 100% of the receivable transactions in the aging report.  I would want to see all of the transactions that are right, wrong or indifferent in nature.  I would want substance over form.  I would want to hug my aging and know that it contains all of the transactions and that the potential offsets are in there for me to see.

But what about when the teenagers play games and reclassify things?  How do you find that? How do you prevent that?  What games can be played with potential offsets?  That’s what experience and training are for, to help you cover your assets.  ABLTrain Icon

Copyright © 2013 Clear Choice Seminars, Inc.  All Rights Reserved

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ABL-Help Updated 1998 to 2017…

ABL-Help

In The Beginning:

What started as a glossary of definitions sometime in 1998  for my students, quickly expanded.  After 6 months of messing around with HLP file generators that used RTF documents, the first release came out in December of 1998.  It started with about 450 glossary words and about 42 ineligible collateral items for receivables and inventory.  We used Visual Basic to make a menubar and then took screen images of every menubar option and linked them.  It looked like a real menubar and it worked (HTML5 before it’s time).

The Village Comes:

But then the e-mails started to come in.  “Hey Joe, what about…” and the lists grew.  My friends at IBM inspired me to add the fishbone diagrams.  E-mails came in from all over the world and the list of ineligible items got bigger and bigger. We added audit insights for workpapers and recently we expanded into fraud alerts, alternative calculations, confirmation finders and other advanced fishbone diagrams (Pro version). It has slowed down in recent years, but it keeps growing and we’ve got 190+ ineligible links now.

Copyright Office Acceptance:

We had to argue with the US Copyright office on the filing of the electronic document as an HLP file and we presented our argument by asking “How come Microsoft can file Form TX and cover their Help files?”   Our Help File document (like millions of others) were made of code, text and images to form a multimedia presentation and the “text” was all code.  Management at the US Copyright office heard our argument loud and clear and changed the copyright form based on our presentations and the lack of solid guidance to clearly cover multimedia presentations.  Yeah, that was us and everyone was nice about it!

Just-In-Time ABL Training:

The ABL-Help file is now installed on more computers than any ABL software product in the world.  Thousands of copies and that includes installs at most of the larger institutions too.  It is considered an “essential” training tool by many back-office departments and new field examiners like the portable nature of having the program with them as they travel.  When Clear Choice Seminars, Inc. was hosting 10-12 cities per year, it was an essential tool to skip the basics and move onto more important analytics.  Of course the ABL-Help file got more and more information over the years and that let us cut out much of the basic stuff from the Intermediate ABL Audit course.

Evolution:

Update at least annually? – ABSOLUTELY!  The file format has changed too.  We switched from .HLP files to .CHM help files and that lead to better control, HTML formatting and the use of JS libraries for the menubars and popups.  We’ve upgraded the software used to make ABL-Help perhaps 5 times along the way and we’ve updated the compiler and installer every year.  The program and installer are also code-signed (COMODO) so that you know it comes from us.

In 2011, we switched to an EXE format so that we could give away a free version and then sell two enhanced version.  Our students (www.ccsiweb.com and www.abltrain.com) and software users (www.finsoft.net) get the more advanced versions.  ABL-Help Pro comes with the Fraud Prevention course on ABLTrain.  All proceeds go to charities!

WWW.ABLHelp.com

The three versions are:

  1. ABL-Help Free
  2. ABL-Help Classic (about $19.00 USD or included with most ABL-Train courses)
  3. ABL-Help Pro  (about $49.00 USD or included with ABLTrain’s Fraud Prevention seminar course)

Future of ABL-Help Training Materials?

Where will it go next?  A lot of that is up to you.  We get great ideas for ineligible items from all over the world.  We have an opportunity to take it in new directions that will add value to the users.  Looks like we’re just getting started when I think about the possibilities.  [Joe]  ABLTrain Icon

Copyright © 2013 Clear Choice Seminars, Inc.  All Rights Reserved