4 Cs of Credit (2024)

I love the last two weeks of the year.The office is beyond quiet and it’s a perfect time to purge files, set goals, and reflect.This year is no different even though I transitioned from working in an office with hundreds of people to working in an office with a softly snoring dog next to me.

As I was cleaning up 2016, I came across a sketch I had done earlier this year to frame out the classes that I would offer.Sharing a refined version seemed like a nice way to close out this year and get ready for the next.It is based on the four Cs of credit: cash flow (sometimes expressed as capacity), character, covenants and collateral.Two things struck me as I was drawing on my whiteboard.It became apparent almost immediately that the four elements were interconnected to a high degree and that each pointed back to cash flow in some way.Why do you have covenants?To protect cash flow.Why do you care if management can execute on its strategy?To understand how the company will generate cash flow.How strong is your collateral in a loan backed by enterprise value?Look to the cash flow.To quote my good friends at Andromeda Simulations International, “Profit is food, but cash is air.”A business needs both to succeed in the long term, but it won’t get far without cash flow.

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As we go into 2017, I’ll continue to explore ideas on how to enhance the performance of credit risk professionals – including thoughts on credit risk fundamentals, policy implementation, process improvement, and talent development.You’ll find these posts both here and on my website.If we aren’t yet connected, I invite you to follow me or send a connection request.Please include a short note why you think connecting makes sense if we aren’t personally acquainted.

One of the more interesting things about being a sole employee is that you could look at having colleagues in two ways: either you have none or you have an infinite number because effectively everyone is a colleague on your journey.I prefer the latter view and am thankful for each of you.

May you each have a peaceful holiday season and a prosperous 2017.