Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2 (Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2.pdf), страница 10

_____________Management policies and objectives are other factors that distinguish companies and affect their need forfinancing and their ability to repay loans. The operating policies of some businesses emphasize profits orcash flow over growth. Some firms have relatively strict accounts receivable and inventory controls, whileothers tend to incur more debt and favorhigher accounts receivable and inventory in their quest to capture a larger share of the market - which, in turn,may lead to greater stability.25Growth-oriented companies might cut their selling prices without the benefit of lower costs in order toincrease sales.

Other companies are less concerned with short-term profits than with long-term maximizationof equity. Understanding its objectives can help an analyst put a company's Financial statements inperspective and evaluate the company's success in achieving its goals. In fact, using the financial statementsto judge the company's success in reaching management's stated goals is a necessity for a complete creditanalysis.Some companies are created because of legal and tax consideration.

As mentioned when discussing jointventure above, many organizations set up separate companies for the sole up separate companies for the solepurpose of owning property or other fixed assets that are then leased back to the organizations to lower theirtaxes. Other businesses, concerned with how their financial statements appear to creditors and investors,might create a separate company to provide off-balance-sheet financing for a portion of the organization'sactivities.Only after understanding the objectives of the company can the credit analyst begin to answer thequestions vital to a financial statement analysis: How successful is the company? Can the company meet its objectives? What financial needs does the company have as a result of trying to meet its objectives? Should the bank attempt to satisfy all or part of the financial needs of the company, and if so, how?IV _____________________A company's relative size, frequently indicated by the extent of its management organization, its stature inthe community, and its clout in the marketplace, may also affect its financing needs and its ability to repaydebt.

The sophistication (or lack thereof) of a company's financial statements may also reflect its size.One ManagerThe manager of a small business is generally the entrepreneur who began the business. The ownermanager typically does not have all the expertise needed to run a company. He or she may have technical orsales expertise, but lack accounting or financial ability, or vice versa. Managers of small businesses often donot hire full-time financial experts, but instead use clerical bookkeepers or an accounting service. Thereforethey may rely on their accountant or their banker to provide financial expertise and direction, a problematiccourse for the banker, given the conflict of interest in protecting both the client and the depositor's money.Small businesses often direct their products or services to limited markets.

The operation either introducesa new product to undeveloped markets or is a minor participant in a larger, more established market.Additionally, small companies often have unsophisticated operations and, unless their owners are wealthy,limited capital resources. Public equity markets are typically unavailable to them, and borrowing long-termmoney is difficult even in the venture capital market.Moreover, the lack of management depth increases the risk of the business to a great degree. If an accidentor ill health befalls the owner, the business will be likely to fail.

If macroeconomic variables affect its market,a small firm is frequently unable to weather the problem due to the limited skills of its only manager.Thus the bank usually serves a critical role in the funding of necessary capital for a small company'sgrowth. The bank expects, in return, not only compensation for its risk (that is, payment of interest), but alsosubstantial protection in terms of collateral, loan agreements, and a continued flow of information from thecompany. Even then, a bank encounters a relatively high degree of risk simply because the failure rate ofsmall businesses is so high.Multiple Managers Functioning in Different AreasA successful small business typically grows into a medium-sized business.

To improve its management,the company will begin to hire functional specialists, such as a controller or marketing experts. Hopefully, thecompany creates management-depth so that, in the absence of the chief executive officer, two or moreofficers are available to deal with macroeconomic crises, like recessions.As it becomes more sophisticated, the multiple manager company may diversify its lines of business. Forexample, a company that began by making paper cups may expand production to make milk cartons, or a26retailer of women's clothing may take on a line of men's clothing as well.

Such diversification usuallyrequires additional capital. The company may also obtain access to venture capital equity markets or attractprivate investors. Access to private and public debt sources also increases.As long as the company continues to grow, it will normally continue to have significant financing needs,and banks will continue to be a major source of funds, especially in seasonal businesses.

This funding role isoften shared among several banks if the business outgrows the local bank's individual lending capacity andcomes, by virtue of its expansion, to have financial requirements greater than the lending policy limits of itsin iti al bank. As the company grows, it also typically begins to fine-tune its financial operations to providebetter and more useful information, especially audited financial statements that it gives to its financial sources.Company Decentralized into DivisionA medium-sized company eventually may become a large company. By then, its management is usuallymore functionally specialized.

Besides employing a treasurer, the company may employ several financiallyastute people to deal exclusively with its ongoing capital needs and its long-range financial planning. Further,the managers in charge of divisions within the company may have significant knowledge of overall operations.They greatly reduce the risk that the company will fail; their combined knowledge helps the company see itsway through times of crises and macro-economic stress. Altogether, that, makes lending money to largercompanies less of a risk. In contrast, smaller companies have only one or, at best, a few functional specialistson whom to rely in hard times.When a large company becomes a major economic force, able to control or influence its industry'smarkets, it may substantially affect product pricing and developmental trends. Operationally, large companiestend to be sophisticated and use the latest and most complex technology, possibly including the use ofrobotics and computer-based cost accounting.

Large companies generally have the capitalization, visibility,and operating record to enable them to draw from a wide variety of financial resources, including public debtor equity markets. At this point, the bank is likely to be a secondary provider of funds since public debtmarkets offer large, successful firms a pricing advantage over borrowing from commercial banks.V______________________A company's objectives and managerial decisions affect the company's balance sheet mix. Generally, acompany's financial policies can be characterized as conservative or aggressive. Even companies within thesame industry an have quite different balance sheet characteristics if their basic managerial policies differ.Companies with conservative financial philosophies tend to emphasize short accounts-receivable terms, lowinventories, surplus cash, and marketable securities balances as well as little debt as a source of financing,even if these policies reduce sales somewhat.

Avoidance of risk-taking generally results in a balance sheet inwhich equity predominates over debt-a condition approved of by lenders. Conservative managers usuallyplace less reliance on trade credit and take very strict control of their accounts receivable rather than extendpayment terms as a marketing tool to encourage sales, since conservative management places most of itsemphasis or equity, the company's growth is limited by the availability of internally generated equity (throughretaining profits) and, selling new common stock.A more-aggressive financial philosophy would emphasize enhancing returns on equity by increasing theamount of debt rather than equity since stockholders usually expect a higher return in line with the higher riskthey take.

Also, the more assertive policy would encourage sales by extending payment terms, maintaininglots of inventory in order to more promptly respond to customer orders, and purchasing the latest in fixedassets to permit growth. The resulting balance sheet would probably show higher debt, lower equity. andgreater investments in accounts receivable, inventory, and fixed assets.Less-stringent credit requirements and more-liberal credit terms invite a significant increase in accountsreceivable.

A management team that emphasizes the importance of never losing a possible sale must alsomaintain a heavy inventory. Such policies require financing, which often is accomplished with liabilitiesrather lhan with equity because most companies do nut generate profits quickly enough to pay for the assetsthat rapid growth requires. In general, new and smaller businesses take a more aggressive nance because oftheir limited access to equity.27VI________________One way to determine a company's management philosophy is to analyze its current assets and liabilities.Working investment analysis focuses on the current assets of a company and how their growth is financed assales grow.