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 2

Credit management attempts to manage the credit risk inthe lending portfolio by establishing lending, analysis, and work-out guidelines or policies appropriate forthe institution. Financial statement analysis is one of the parts of credit decision making: assessing the riskthat companies will not be able to repay their loans as agreed. The loan officer can frequently lessen thehazard of loss by accurately appraising a customer's creditworthiness-ability to repay-and then ensuring thatthe loan is properly secured, structured, and monitored.To evaluate risk, attempt to identify the uncertainties the commercial borrower faces to see if its financialstrengths and weaknesses are balanced. If the borrower's strengths exceed its weaknesses by a marginsufficient to cover the perceived uncertainties, the loan represents an acceptable credit risk.

This concept isoften expressed as a formula:Strengths - Weaknesses> Uncertainties = Acceptable credit risk.Some of the risks that will be examined throughout the book include liquidity — the ability of a firm (1) to respond quickly unexpected financial problems andopportunities, (2) to increase assets if sales grow, and (3) to repay short-term debt from normalconversion of assets to cash; net cashflow — the generation of cash for long-term purposes such as fixed asset replacements, netadditions to current assets, and repayment of long-term debt; operating profit — the evidence of operation successful enough to reassure investors about the firm'ssurvival and growth in the future; and leverage — the extent of debt, as a source of the funds used to operate the business, and loanrepayment requirements, relative, respectively, to the equity cushion and variability of cash flow.VI ______________The scope and focus of financial statement analysis will vary somewhat depending on the specificpurpose of the examination.

For example, whether the company is seeking long-term or short-term financingor whether the analysis is being done as part of the ongoing monitoring of an existing loan will affect thenature of the financial statement analysis.Determining the Depth and Focus of the AnalysisBoth the size of the requested loan (relative to the size of the firm) and its terms affect the financialstatement analysis. A large loan will require relatively more effort on the part of the bank to assure itself thatan analysis of sufficient depth has been completed. This is not to say that a small loan cannot have greatuncertainty surrounding its repayment.

Nevertheless, the smaller interest "payment on the small loan may not5profitably permit extended analysis, and thus the financial statement analysis may have to be more cut-anddriedCompanies requesting loans generally need to finance either current assets (such as accounts receivableand inventory) or fixed assets (equipment, buildings, or land). A basic tenet of lending dictates that atemporary or seasonal increase in current assets should be financed by short-term loans, while increases infixed assets should be financed by long-term loans.Here is why: the principal on short-term loan is payable in full with the conversion of inventory andaccounts receivable assets to cash during the operating cycle.

Normally, this occurs within one year;therefore, short-term loans are Listed on the balance sheet in the current liabilities section. An example of thisis the farmer borrowing seed money and repaying the loan at harvest. In contrast, long-term loans are usuallypayable over the.

life of the asset they helped finance. They have maturities of one year or longer and arereported is long-term liabilities. An example of his is the fanner financing a tractor over three or four years.Thus, in most cases, the term of the loan and the type of the analysis will be determined by the purpose of theloan,Monitoring ProcessFinancial statement analysis is an important part of both the initial decision to approve a loan and theongoing monitoring process during the entire period that a loan is outstanding. It is particularly useful inidentifying problem loan situations early on. With early detection of a problem situation, the bank can oftenhelp the company take prompt action to turn the situation around.

In addition, banks often monitor their largerborrowers-to whom they may have given credit lines-even when the borrowers have no loans currentlyoutstanding.The Loan Approval ProcessThe loan approval process in most institutions involves one or more decision makers, sometimes in theform of a committee, who approve the loan. Generally, the loan officer is referred to as the person, or one ofthe persons, with loan approval authority who signs for the loan.

The credit analyst has the responsibility ofpreparing information for these decision makers in the desired format and according to the policies of theindividual institution. Sometimes, the analyst works closely with the senior credit officer or loan officertoprepare the analysis in written form. At other times, the analyst works directly with the prospectiveborrower and then makes a presentation to the decision makers, sometimes assembled into a loan committee.This is often the case when the analyst and loan officer are one and the same person, but with insufficientauthority to commit the bank to the specific loan.In cither case the written credit analysis is a digest of both the facts concerning the financial andnonfinancia! information, as the analyst (and, sometimes, as the loan officer) sees them, and the evaluation ofthose facts for the purpose of predicting the likelihood of future repayment of the loan, as the analystinterprets it. The full-fledged credit presentation, possibly dwelling on economic conditions or marketcompetition, goes beyond the scope of this book, which concentrates on examination of the financialstatements themselves.

While these are viewed in light of the nonfinancial information, the primary focus ison how the information they impart can be useful to the full credit analysis, a larger issue. Thus, financialstatement analysis is a subset of credit analysis.(from "Analyzing Financial Statements" byThomas P. Carlin, Albert R. McMeen )2. Scanning exerciseScan text 1 to find information on four aspects:g)Monitoring process;h)Net cash flow and operating profit;i)Financial structure;j)Trends and comparative performance3. Vocabulary study exercise6GLOSSARYfinancial statement analysiscommercial lending processloan officerfinancial structureoperating cycletrends and comparative performancelines of businesspertinent government regulationscredit riskliquiditynet cash flowoperating profitleveragemonitoring processloan approval processinterpretive aspects of analysissubset of credit analysisgenerally accepted accounting principles (GAAP)to evaluate riskthe loan approval processa) find English equivalents for the following:Вкладывать значительные объемы своих кредитов, выдаваемые коммерческими банками;финансовая стабильность предприятий; принять правильное решение о предоставлении кредита;вносить вклад в рост доходности банка; отвечать потребностям общества; циклические колебания;рыночная ценность имущественного залога; снижение доверия инвесторов; искать дополнительныекапиталы для расширения производства; ценная реакция; выдавать краткосрочные кредиты подзапланированные выпуски акций; недостаточно капитализированный заемщик; общепринятыепринципы бухгалтерского учета; использовать одинаковые концепции в бухгалтерском учете;издавать финансовые отчеты; деление прибыли; процесс предоставления коммерческого кредит;анализ финансовой отчетности; операционный цикл; тенденции и сравнительные результаты работы;оценить риск, чистый денежный поток; операционная прибыль; ликвидность; автоматическивозобновляемый кредит; часть коммерческого кредита.b) find Russian equivalents for the following:To invest much of assets in loans; to make sound judgment about the financial stability; to apply forloans; to make sound lending decisions; to contribute to the profitability of the bank; to meet the needs ofthe community; cyclical swings; market value of collateral; a drop in confidence by investors; the collapseof the stock market; to extend short-term credit against planned stock issues; under-capitalized borrowers,loan portfolios; increasing use of debt to finance business; to divide the profits; to serve as the sole source ofequity financing; innovative debt instruments; revolving credit; to be converted to equity ; at a present price;advent of corporate income taxes; to deduct interest expenses; technical manipulation of the data.c) match the following notions with the correct definitions or phrase:a) Even through many firms today do not issue financial statements backed1.credit riskup by an independent audit, most banks require that firms prepare theirstatements in accordance with ________2.Trends andComparativePerformanceb) The __________ normally begins with an interview between thecommercial client and the loan officer and continues through the stages ofcredit investigation, financial statement analysis, loan structuring and pricing,loan negoliation, loan documentation and closing, and loan follow-up.73.

operating profit4. net cash flow5. liquidity6. leverage7. Operating Cycle8.commerciallending process9.StructureFinancialc)____________ involves the systematic examination and interpretation ofinformation to assess a company's past performance for the purpose ofpredicting future viability.d) _____________ — the assets the company maintains and the liabilities ithas incurred to acquire and keep those assets, including thecompany'scapacity or flexibility to deal with both planned and unplanned changee) _____________ — the businessgoes through to bring products or services to the marketf) _____________ — the direction that the business operation is going, asevidenced by comparison of financial results from more than one year and withother companies in the same industry and size.g) _____________ — the ability of a firm (1) to respond quickly tounexpected financial problems and opportunities, (2) to increase assets if salesgrow, and (3) to repay short-term debt from normal conversion of assets tocash:h) _____________ — the generation of cash for long-term purposessuch as fixed asset replacements, net additions to current assets, andrepayment of long-term debt10.Financialstatement analysisi) ______________ — the extent of debt, as a source of the funds used tooperate the business, and loan repayment requirements, relative, respectively, tothe equity cushion and variability of cash flowj) ______________ — the evidence of operation successful enough toreassure investors about the firm's survival and growth in the future;11.generallyacceptedaccountingprinciples (GAAP)k) ______________ — the principal risk-called by bankers — is that theborrower will not meet the terms of the loan and that secondary repaymentsources, such as collateral, will be insufficient to cover the losses.4.