We are going to finish this module with a Case Study in which we will try to examine most of the non-financial and financial factors affecting an individual business and how we may come to a considered opinion on the level of risk involved for a bank lending to that business.
It should be clear from all of our discussions so far, that exact assessment of risk is impossible. The future holds many surprises! To counteract our inability to predict the exact risk with any one particular credit facility, banks try to keep overall risk within acceptable limits by several means, such as those highlighted on […]
Who is the debtor? This may seem an obvious, and perhaps irrelevant question, but the lending banker must be fully aware of the person or entity to which he is providing credit, and who, or what entity, will have a legal obligation to repay the loan.
Just as it is vitally important that the lending banker ensures that the business has the right total amount of finance needed to keep the business going, has repayment capacity for that finance, and has given us adequate security, it is equally important for the banker to ensure that the business has the mix of […]
In this training module up to now, our main focus has been on how we might establish if our customer has repayment capacity for any existing or proposed loans.
The banker’s primary interest in analysing financial statements is to establish the level of risk attaching to existing or proposed borrowings, but more particularly, to estimate if repayment capacity exists at present and is likely to exist throughout the period of the borrowings.
There are an extremely large number of ratios which can be calculated from any given set of financial statements. However, the lending banker will primarily be concerned with those ratios which give an indication of the stability of the business and its ability to generate repayment capacity.
Introduction to Ratio Analysis The principal method used to interpret financial accounts is Ratio Analysis, which is simply a means of highlighting, in arithmetic terms, the relationship between two figures in the accounts.
A lending banker will often spend quite a while analysing information from the Balance Sheet and from the Profit and Loss Account and this can be very useful in assessing risk. We will look at this analysis in more detail in the next session.
Next, let us turn to the Profit and Loss Account, which is designed to show the profit or loss which a business achieved or suffered during a particular accounting period. It does this by showing the sales achieved during the period and deducting whatever costs were incurred to achieve those sales.
