Finan 4310

What's on the income statement?

revenues, expenses, net income

Examples of industries whose customers likely have high bargaining power:

-Raw sugar manufacturers (there are about twenty-five in the U.S. and Canada) whose customers can easily switch suppliers because raw sugar, whether made of cane or beets, is undifferentiated. ● Recycling services tend to have high fixed costs, and contracts with cities, counties, etc. provide critical-mass business to cover fixed costs and that enables them to bid competitively on commercial business. Municipal customers therefore control large contributions to the recyclers' fixed costs and can bargain accordingly. ● Commercial bakeries' grocery-chain customers have high bargaining power because the grocers can and do produce some baked goods in their stores and in their centralized baking plants.

late contraction.

-Recession -As the economy slows down, unemployment goes up and interest rates gradually fall. Credit is available to only the most creditworthy borrowers. Eventually, supplies of goods and services shrink to the point that businesses begin to see new opportunities for growth. The expansion cycle begins again.

Amount Requested

● Does the request make sense? ● Is the request tied to a specific business strategy? ● Is the amount consistent and sufficient for the purpose?

Operating expenses

-(also known as S, G & A) are those that are necessary to support the customer's infrastructure. -They include: ● Selling expenses: expenses necessary to develop, package, market, and sell the product or service. ● Administrative expenses: expenses relating to the overhead costs of the company.

business cycle

-A recurring but irregular long-term period of alternating periods of economic growth and decline. -Fluctuations in economic activity, such as employment and production - Actual cycle behavior is usually complicated by the rate of inflation, the international balance of payments, the level of federal debt, and economic conditions around the world.

Authentic Revenues

-Are reported sales or income streams a true reflection of market demand with independent parties for the product or services? -Do these sales have a high probability of converting to cash -What are the prospects for sales in the future, i.e., are historic sales levels repeatable? -the inflows (cash or other benefits) that generally result from the sale of goods and services. Revenues can also result from the gain on sale of long-term assets such as land or equipment.

late expansion

-Boom -As the expansion continues, consumer and business spending and demand for credit increase, pushing interest rates up. Capacity utilization climbs and prices stabilize for goods and services. Finally, the higher cost of credit and of goods and services begins to dampen consumer spending and business expansion.

Manufacturing Characteristics and special needs

-Characteristics ● Dominated by larger, more mature firms. ● High fixed assets requirements. ● High fixed costs. ● High cyclicality. ● Moderate seasonality. ● Cost accounting. -special needs: ● Fixed cost management. ● Inventory control. ● Long-term forecasting. ● Equipment/process obsolescence. ● Environmental considerations.

Retail Characteristics and special needs

-Characteristics ● Dominated by small firms ● - some "mega" retailers coming into market. ● Low fixed asset requirements-unless mega retailer. ● High inventory requirements. ● Moderate to high cyclicality. ● Variable seasonality. ● Tends to have high margins due to value added. -Special Problems ● Gross margin management. ● Inventory management. ● Fixed cost management. ● Sales force hiring, training, and retention.

Wholesale Characteristics and special needs

-Characteristics ● Dominated by small firms. ● Size and location of warehouse facilities and equipment varies. ● Low fixed costs. ● Accounts receivable and inventory are usually the biggest assets. ● Moderate cyclicality. ● Low seasonality (depending on subsector). ● Lowest level of profit- ability due to least "value added. -special needs Gross margin management. ● Inventory control technology. ● Accounts receivable collection. ● Structuring debt requirements properly. ● Needs a quick ● cash-to- cash cycle. ● Available transportation networks.

Lending Decision Process Steps

-Customer -Amount Requested -Terms Proposed -Purpose -Reason -Source of Repayment -Summary, Recommendation, and Cross-Sell Opportunities

Macroeconomic Influences

-Describe an industry's sensitivity to macroeconomic factors. -The effects of the general business cycle on a company's ability to do business. ● Secondary effects of the business (or economic) cycle, including interest rates, consumer and business demand for goods and service, housing starts, and rate of unemployment.

Analyzing Revenues

-Determine the source and sustainability of revenues. -Following are questions you might ask to analyze revenues: • Authentic revenue • Repeatable revenues • Market share • Sales growth • Sales fluctuations • Sales terms • Sales mix • Net sales • Backlog or unprocessed orders • Other income/extraordinary income

Identifying Seasonal Risks

-OBJECTIVE: Describe a customer's susceptibility to seasonal risks. -The seasonal cycle is a temporary significant expansion of the operating cycle. -examples : ● Swimming pool operators ● Boating supply retailers located in Minnesota ● Candy manufacturers ● Florists, etc. ● These companies naturally have periods in which inventory swells in anticipation of seasonal sales, followed by a period of exceptionally high receivables caused by the high sales season.

Analyzing Income Statement Ratios

-Objective: Evaluate the level and trend of profitability in the context of the company's overall strategy. -Highlight the following process for analyzing the income statement: 1. Analyze the trends of each revenue and expense. Are they increasing, decreasing, or staying the same? 2. Determine the reason for increases or decreases.Are these changes appropriate for what you know about the business, industry, and management objectives? 3. Develop expectations for the future. Will these trends continue into the future?

early expansion

-Recovery -Interest rates are relatively low, and consumer and business credit are plentiful. Sales and profits usually increase; companies expand physical plants, build inventories, and are optimistic about the future. Perhaps they add employees, start new business lines, or introduce new products. Consumers have high disposable income, partly from secure jobs and increasing wages and partly from available credit.

What are some factors that influence whether a given business or industry is affected by the current business cycle stage?

-Regional economies -Overall industry sector -Nature of a specific industry

The Relationship Building Process

-Step 1: What are the company's strategic and competitive challenges? -Step 2: What are the owner's objectives? -Step 3: What financial services or products can the bank provide to meet the owner's business and personal objectives?

Industry Characteristics

-Use industry characteristics to identify customer needs. -Once the client's needs are uncovered using the Credit Risk Analysis Framework, the next step in the process is to use the results of the analysis to determine how the bank can help the company meet its future challenges and objectives.In addition to a company's shareholder objectives and business strategy, credit needs are driven by the type of industry the company operates in as well as its industry life cycle. -There are four key sectors: ● Manufacturing ● Wholesale ● Retail ● Service

Backlog or Unprocessed Orders

-What is the absolute dollar amount in this category? ● How does the amount compare to that of prior periods and to plant or operational capacity? ● Given current production levels, how long will it take to fill the current backlog?

Intensity of Competitive Rivalry

-When there are many competitors, firms have to compete aggressively for market shares, which can result in lower profits. -An industry exhibits intense competitive rivalry when: ● There are many players of about the same size. ● There is little to distinguish competitors and their products, inviting price competition. ● The industry is in a mature or declining life cycle stage when growth is generally possible only at the expense of another company. ● Barriers to exit are high: It is very expensive to get out of the business, perhaps because the industry uses specialized equipment for which there is no market outside the industry, but no current competitors wish to expand. When exit barriers are high, companies in distress are somewhat more likely to "fight to the last" and may price or market more aggressively than normal.

Industry-Specific Risks

-a hazard that applies only to a particular company, industry, or sector. -Ex)● Many industries incur significant product liability risk, such as food and beverage industries, ladder manufacturers, and airlines. ● Google incurs litigation risk because it pushes the envelope on interpretations of intellectual property law. ● Financial industries are susceptible to market risk, through interest rate, stock market, and foreign currency exposures. Market risk may also affect a very broad spectrum of companies that need to raise capital (including loans) and are exposed to interest rate risk.

Analyzing Expenses (Costs)

-analyze the nature and scope of expenses. -a type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income

Threat of Substitute Products

-extent to which alternative products/services may replace the need for existing products/services -locate alternative products with lower prices, or that are more readily available -Examples of when there is a high threat of substitute products include: ● Customers have no brand loyalties and/or there are no established brands. ● Changing to another product saves money without sacrificing features or performance. ● It is both simple and inexpensive to change to another product. ● Makers of substitute products have very high margins and can easily attract the new buyers with price reductions.

early contraction

-slowdown -As a period of contraction begins, consumers and businesses are not as optimistic about the future. Fewer new projects or additions are begun. Less credit is demanded as borrowers try to reduce reliance on debt and become more liquid.

COGS

-the cost to produce the goods or services. COGS is the cost or expense (direct or indirect) to produce the goods or services sold during the period, including materials, labor, and other costs incurred directly in the production process. In some cases, depreciation will be included. ● What is the inventory—raw materials, work in process, or finished goods? ● What is the inventory's current market value and method for valuation and what would be its value in a liquidation mode? ● Does the company take available discounts on accounts payable to reduce funding costs? ● Is there any stale inventory (old and not saleable), and has the company utilized their suppliers' returns and allowance policies to eliminate any unusable or damaged inventory?

fixed costs of a business cycle

-the lease and loan payments -depreciation of manufacturing buildings and equipment, -factory overhead, and maintaining a base level of management and administrative employees below which the company cannot function.

Industry Life Cycle

-the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry -An industry consists of companies that sell like products or engage in like activities. Usually an industry develops in a pattern that closely follows the evolution of demand for the industry's family of products.

Porter's Five Forces

1. Bargaining power of customers 2. Bargaining power of suppliers 3. Threat of new entrants 4. Threat of substitute products 5. Intensity of competitive rivalry

Staffing

Employee turnover, training, backup for key responsibilities, and hiring and firing practices. Is there a human resources department, and does it have complete personnel files, employee manuals, and policies?

Directing

Evidence of clear policies, goals communicated to employees, and feedback to employees about results. Do managers and supervisors meet regularly to compare performance with plans and to discuss the effects of external trends or events?

Extraordinary expenses

Are there one time or nonrecurring expenses that occurred during the period?

Organizing

Evidence of orderly workflow, even distribution of work without bottlenecks, and organization charts and job descriptions. Are organization charts up to date, and do they realistically portray the hierarchy?

Service Characteristics and special needs

Characteristics ● Dominated by small firms. ● High investment in accounts receivable. ● Fixed asset requirements depend on size of company. ● Low fixed costs, except personnel costs. ● Low cyclicality. ● Moderate seasonality. ● Margins tend to be higher in specialized knowledge businesses. ● Low barriers to entry in "commodity" services. -special needs ● Labor expense management. ● Job costing. ● Pricing. ● "Value" perception of service provided

Planning

Evidence of work scheduling, coordination with other functions, and written plans for the future. Is there a five-year strategic plan with components for each functional area of the company?

Controlling

Costs identified and allocated to products or functions; budgets prepared and reviewed against actual performance; standards set and evaluated; financial reports that are timely, frequent, and regular.

The Bargaining Power of Customers

Customers in an industry have high bargaining power when they can impose pressure on the sellers' margins. Examples of when buyers are powerful include: ● There are a few, but large-volume buyers. ● Products are standard or undifferentiated, so easily procured from several suppliers or replaced with a substitute product. This is especially threatening if customers can switch to another supplier or to a substitute product without incurring large expense. ● The supplying companies have high fixed costs, so are pressured to lower prices to prevent loss of sales just to keep plant and equipment running at or above a break-even point. ● Customers could produce the product themselves. ● The product is not of strategic importance to customers.

Fixed and variable costs

Fixed costs and variable costs relate to how costs are incurred relative to the number of units produced and sold. ● Fixed costs exist regardless of the amount of unit sales. Rent and office staff salaries are examples of fixed expenses. ● Variable expenses relate directly to, and fluctuate with, the number of units or services sold. When analyzing selling or administrative expenses, variable expenses typically relate to a range of sales or sales levels. For example, if a company is expected to increase sales in a particular product line by 25%, then another customer service representative may need to be added.

Industry, Product, and Company Life Cycles

OBJECTIVES: ● Identify the life cycle stages of example industries and explain their possible impact on a customer's business. ● Explain the implication of company and product life cycle stages on a customer's financial characteristics and likely financing needs. -Industries, products, and companies evolve through predictable stages of development, and understanding these stages helps us interpret financial and non-financial challenges a company faces or is likely to face.

examples where intensity of competitive rivalry is high?

Grocery stores also exhibit similar characteristics. Consumers typically can choose from several chains or independent grocers of similar size, whose product lines are similar. The industry is mature.

Sales terms

Has there been a significant change of the terms (credit or otherwise) under which this product or service is sold?

Overall industry sector

Some industry sectors are immediately affected by a contraction, whereas others generally experience a reprieve before feeling the full brunt of a recession. Generally, manufacturing experiences an early demand reduction during a contraction, as retailers and wholesalers begin to reduce inventories. Service sector businesses, however, respond more slowly.

Net Sales

How are net sales derived from gross sales as a result of discounts taken and returns and allowances?

Repeatable revenues

How is demand for the product or service expected to change in the future? These revenues are sometimes called sustainable revenues.

Sales mix

How many products and/or services does the company sell and are there concentrations by product or customer or both?

Other expenses/Income taxes

Income taxes include federal, state, and local taxes paid during the period.

Sales growth

Is sales growth a result of an increase in market demand and the number of units sold, or price increases both from inflationary pressures and increased market demand?

Sales fluctuations

Is the current year sales level depressed or inflated relative to historic levels?

Summary, Recommendation, and Cross-Sell Opportunities

Is there a high probability that this debt will be repaid? -Are the objectives -both personal and business of the owners clearly understood? -Are the borrower's needs being met with appropriate financial solutions? -Have potential future solutions for this company been identified?

Nature of a specific industry

Not all industries are equally prone to business cycle risks, and in particular, some companies and some industries are less susceptible than others to the challenges of business cycle contraction.

example of an industry where threat of substitute products is high?

Juice drinks marketed as healthy alternative beverages are high-margin replacements for both sodas and traditional juices. The juicing and green smoothie trends threaten traditional vegetable juices, such as V-8, as well.

The Lending Decision OBJECTIVE

OBJECTIVE: Identify the process to analyze both the qualitative and quantitative factors in evaluating a loan request.

growth stage examples

● Gym, health, and fitness clubs. ● Retirement communities. ● Beef jerky manufacturing (growth stems from rebranding jerky as a health food). ● IT consulting. ● Sandwich and sub store franchises. ● 3D printer manufacturing. ● Craft beer production.

Companies have life cycles too

● These stages are heavily influenced by the industry and product life cycles we have already discussed. ● However, a company's life cycle stage does not necessarily coincide directly with that of its industry, or even of the specific product it markets. Through astute (or poor) management, a company can enjoy (or suffer from) a different life cycle stage.

Examples where threat of new entrants is high:

Retail, for any product that can be marketed through Amazon or another online distributor. Small-volume sellers can prosper, without physical retail space, leveraging Amazon's distribution reach. These small sellers may not have purchase- or manufacturing-scale cost advantages compared to traditional retailers of the same or similar products, but Amazon brings the market to them in a low-cost way that can allow profitable sales, nonetheless.

Regional economies

The business cycle does not necessarily influence economic activity at the same time or to the same extent in all regions of the country. Regional economies can be stronger or weaker than the national economy.

Discretionary and non-discretionary expenses

The differences between discretionary and non-discretionary expenses relate to the necessity of incurring the expense in operating the company; they are defined as follows: ● Non-discretionary expenses are those which are necessary to keep the company in operation. ● Discretionary expenses are those that typically make running the company easier or more enjoyable. When there is a downturn in the company's performance, these discretionary expenses can be reduced.

Analyzing the Income Statement

The income statement summarizes the revenues and expenses of a company over a period of time and reflects the difference as a profit or loss.

Who Determines Where We Are in a Given Cycle?

The official peaks and troughs of the U.S. cycle are determined by the National Bureau of Economic Research in Cambridge, Massachusetts. ● NBER identifies the peaks and troughs based on its assessment of factors such as gross domestic product (GDP) and employment growth.

Industry Example:

household appliance industry's product includes a full range of kitchen appliances, washers, and dryers, and even includes temperature-controlled wine storage appliances and outdoor kitchen equipment.

Market share

What is the company's sales level versus the entire market for the product or service?

Threat of new entrants

a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry -easy and/or inexpensive to enter the market. -Examples of when an industry has low barriers to entry (and thus high risk of new entrants) include: ● Requirements for scale economies are minimal. In other words, a company does not need to be large to earn a profit; higher-volume competitors do not gain a significant cost advantage compared to smaller companies. ● There are no competitors with significant brand loyalty, and/or customers are not influenced by a brand in their purchase decision. ● There are no legal barriers to competing, such as copyrights or patents. ● There is no scarcity of vital resources, such as raw materials or intellectual or creative expertise. Existing competitors in the market do not control these resources. ● It is not expensive or difficult for customers to switch to a new provider or product. ● There are no regulatory impediments to entry, such as government sanctioned monopolies or exclusive rights.

Bargaining power of suppliers

a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs -Some examples of when suppliers are powerful include: ● The market is dominated by a few very large suppliers. ● The suppliers' customers are not concentrated in a few large players. ● There are no substitutes for the product. ● It is expensive for a company to switch from one supplier to another. ● Suppliers are in a position to integrate forward—take the customer's role in the industry product chain, gaining scale economies and higher margins.

Porter's Model

apply to identify and interpret the extent of competitive forces in a customer's industry.

COGS equation

beginning inventory + purchases - ending inventory

Cyclical Risks

can span time periods shorter or longer than one calendar year.

Four stages of the business cycle

early expansion, late expansion, early contraction, and late contraction.

Evaluating Management Adequacy

examples are: ● Does the company that must control its cost of raw materials have a strong purchasing manager, and does that person have a successor or a backup? Is this manager aware of alternative suppliers and the cost of trade credit? Are purchasing and inventory records kept accurately and reviewed often? ● Does the company that needs to minimize waste of materials in the production process have capable plant management, production scheduling, and skilled control of work-in-process? Are production supervisors well trained to carry out the options? ● Does the company that has made its fortune in innovative new designs still have talented designers? Is there an ongoing commitment to development of new products? ● Does the company that excels because it does a better job of determining its customers' needs have ongoing market research?

Company Life Cycle: Growth

~~Strategic Focus: -Grow the company to achieve market share, brand aware- ness, and to create scale efficiencies. -Marketing goal is to differentiate the firm's product from competitors. -Pricing strategy is to try to retain pricing if company leads market; discount -to win business if a smaller player; and/or introduce innovation to spur growth at higher margins. ~~Financial Characteristics: ● High sales growth. ● Profits stabilize. ● Cash flow is tight (high growth diverts funds into growing inventory and receivables) ~~Company needs funds for: ● Sales growth/ inventory, A/R. ● Product development. ● Marketing. ● Plant/equipment

Company Life Cycle: Introductory

~~Strategic Focus: -Invest in product development. -Marketing based on innovation if the company has introduced the product; based on better mousetrap and/or lower price if entering as a new competitor. -Product pricing strategy: no need to discount if industry is in introductory stage; if a late entrant during industry's growth stage, win market by lowering price. ~~Financial Characteristics: ● Moderate sales growth. ● High costs if innovator; less if imitator. ● Losses if innovator; some profit if imitator. ~~Company needs funds for: ● R&D. ● Plant/equipment. ● Marketing. ● Inventory and accounts receivable.

Company Life Cycle: Mature

~~Strategic Focus: -Protect market share from newer entrants who may be discounting and/or offering innovation. -Marketing goal is to promote brand awareness. -Product development strategy is to devise new and improved variants. -Operational focus is to become as efficient as possible, to protect profits through cost control. ~~Financial Characteristics: ● Low sales growth, often at rate of inflation. ● Profits are stable. ● Cash flow is strong, as investments in inventory and receivables slow. ~~Company needs funds for: ● Dividends. ● Marketing. ● Base level of inventory and A/R. ● Equipment that adds efficiency.

Company Life Cycle: Decline

~~Strategic Focus: -Try to re-enter an earlier stage, possibly through product in- novation or merger/ acquisition. -Companies staying in decline do not succeed at rejuvenation and focus becomes profit protection through cost control, firm downsizing. -Consider selling to a stronger company, especially if industry is NOT in decline cycle. ~~Financial Characteristics: ● Profits erode as sales-volume drop creates expensive excess capacity. ● Cash flow is stable, as collections out- pace reinvestment in inventory and A/R. ~~Company needs funds for: ● Dividends. ● Marketing. ● Restructuring expenses.

Lending Decision Process

• Business Strategy • Industry • Management • Income Statement • Balance Sheet • Cash Flow • Projections

Expense categories:

• Cost of goods sold • Operating expenses • Discretionary and non-discretionary expenses • Fixed and variable costs • Other expenses • Income taxes • Extraordinary expenses

What to look for Assessing Business Strategy:

• Does the company understand its strategy? • Is the strategy realistic and appropriate? • Is the company focused on following its strategy? • Does the company review/revise its strategy as appropriate?

Five Classic Management Tasks

• Planning • Organizing • Staffing • Directing • Controlling

Less Susceptible Industries to Business Cycle

● Beverages ● Agricultural chemicals ● Accounting and auditing ● Educational services ● Commercial sports ● Communications equipment ● Membership organizations ● Museums, botanical gardens ● Pharmaceuticals ● Insurance ● Food-related ● Energy ● Medical and health-related ● Federal, state, and local government-related services -Many of these industries provide necessities or public goods for which demand remains strong throughout the business cycle.Other industries in the list illustrate that demand for entertainment is resilient, such as professional sports and museums. Similarly, many economists observe that sin industries, such as tobacco and liquor, are recession- resistant.

Assessing Business Strategy

● Business strategy is a statement of the company's mission or goals and how it proposes to accomplish them. Examining the business strategy provides more information to help make valid judgments about the company's chances for success. ● To evaluate the suitability of the business strategy, it is important to relate what is learned in the company overview to what is known about the economy and the industry in which the company competes. ● When discussing strategy with company managers, the goal is to learn how they view the company's external challenges, as well as how they are responding to them in their quest for company success. ● In management discussions, look for signals that company managers have evaluated the impact of their customers' and suppliers' bargaining power, the threats of new entrants and substitutes, and the extent of competitive rivalry in the market. ● Determine if they have identified reasons why it is challenging to do business in their industry, reasons why some competitors may have certain market advantages, etc. ● Based on the lender's understanding of the five competitive forces, plus his/her assessment of business, industry, company, and product lifecycles, a lender can play a very valuable devil's advocate role in conversations with management.

Highly Susceptible Industries to Business Cycle

● Construction ● Household furniture and appliances ● Personnel supply services ● Plumbing supplies ● Stone, clay, and miscellaneous mineral products ● Metal coating and engraving ● Concrete, gypsum, and plaster product ● Cutlery, hand tools, and hardware ● Carpet and rugs ● Motor vehicles ● Equipment ● Retail trade -Many of these industries provide products and services that consumers and businesses can postpone purchasing during a recession. Others are tied directly or indirectly to construction industries, which are particularly recession prone.

decline stage

● Demand for the product wanes and industry sales decline. ● Company focus is on cost reduction, with less emphasis on marketing. ● Product innovation has stagnated, or a substitute product has met the market's needs in ways that are more attractive. ● There is often an industry shakeout as competitors exit the industry and those who remain continue to consolidate to gain additional efficiencies. ● Some dominant firms will very successfully compete in the smaller market, although profits are generally smaller than in the growth and mature stages. Some companies fail when sales can no longer cover fixed costs or when the company lowers prices in an attempt to regain customers. ● Well-managed companies avoid the declining stage by introducing related innovations and/or by acquiring or merging with complementary products for which market demand is still vibrant. Alternately, they may find alternate outlets for the product, such as in developing countries where a market may still be growing.

Examples of industries where supplier bargaining power is high:

● Helium suppliers. Party stores, MRI makers, welders, and semiconductor manufacturers are examples of companies that purchase helium, which is in short supply. Helium suppliers are in a good position to raise prices, because sources are scarce (75% of the world's supply is produced in the U.S., most of that in one area of Texas. Helium is produced as a by-product of natural gas production).

Source of Repayment

● How and when will the cash be generated to repay the debt? ● Are there multiple sources of repayment? ● Business Strategy: − What does this company do?Is the company pursuing a reasonable business strategy for its industry? ● Industry:What are the risks and strengths in the business and its industry and how might I help the customers offset these risks? ● Management:Does the management have the ability to implement its strategies and respond to problems?Who are the decision-makers and what is their financial philosophy? ● Income Statement:What events caused past revenues and expenses and how will these affect future profits? ● Balance Sheet:Does the company have the financial structure to implement its business strategy, withstand shocks, and meet its debt payments?What are the company's liquidity and leverage positions? What are the quality and efficiency of its assets? ● Cash Flow:Does the company's matching of sources and uses reflect a healthy financial condition and good financial management? ● Projections:Do the projected financial statements demonstrate that debt can be repaid under reasonable and predictable circumstances?Are assumptions consistent with information from the analysis of the business, its industry, management, and past financial performance?

Purpose

● How and when will the money be used? ● Is the purpose consistent with the business strategy and credit union policy? ● Does the purpose make sense?

Terms Proposed

● How should the debt be structured to reduce risk?

growth stage

● If the product has gained market acceptance, sales build rapidly. Additional companies enter the industry, and each firm's marketing goal is to differentiate its offerings from competitors' products. ● Profits can be made, although significant marketing expenditures, coupled with increasing price competition from new entrants, means profits are generally moderate. ● Toward the end of the growth stage, companies begin to create scale economies that improve profits. The growth stage ends when demand for the product begins to level off. ● The growth stage can be extended (or re-entered) when an industry introduces innovation that rejuvenates demand in a newer version of a product. For example, the recorded music industry re-entered a growth stage several times, overcoming declining sales of vinyl records with the innovations of S-track and cassette tapes and then compact discs.

primary risks to a bank when lending to companies with seasonal risks?

● If the season fails—e.g., a dry winter for a company that sells road salt to municipalities—line of credit outstandings to finance unsold inventory or pre-season expenditures may wait nearly a year to be repaid. ● Lenders must understand the nature of a company's seasonal risks, consider the probability of a failed season, and evaluate both management's strategy and the company's financial resilience to respond to such an event.

introduction stage

● In this stage, the industry is just beginning to become defined. It may be the result of a new product category that meets new needs, or the product may meet existing needs in an innovative fashion. ● There may be few competitors in the industry and considerable question about the longer-term viability of the industry's product family and thus of the industry itself. ● Companies in an introductory-stage industry focus their marketing message on the uniqueness of their products. They target customers (innovators and early adopters) interested in the uniqueness of the product who tend to have little concern about the price. For this reason, it may be difficult in early stages to say that a product falls within an industry; it is possible that the product is the industry. ● The small number of competitors tends to support higher prices. The market is limited, and thus sales are modest. Although product prices are high, so are expenses to develop, refine, and market the product, and many companies in introductory-stage industries struggle to earn a profit.

Other Income/Extraordinary Income

● Is there interest income from cash equivalents and investments? ● Is there rental income from customer lists? ● Is there real estate rental income? -Is there unplanned income received from a transaction that will only occur once?

decline stage examples

● Printing (large commercial printers and local print shops), the direct result of substitute products (digital media). Also ink manufacturing for similar reasons. ● Computer manufacturing in the U.S. (annual growth is projected at negative 13.2% in the next 10-15 years; the primary influence has been import penetration into the manufacturing sector). ● Apparel and fashion accessories manufacturing (import penetration). ● Family recreation centers, which includes karaoke bars, miniature golf courses, and bowling alleys (replaced by home versions/video games and other digital diversions).

introduction stage example

● Reputation management, which offers the service of suppressing negative Internet search results for both individuals and enterprises. ● Digital money, also known as cryptocurrency, virtual currency, and alternative currency. For example, Bitcoin. ● Home delivery of meal ingredients (pre-measured and partially prepped ingredients for one or more meals, with cooking instructions).

maturity stage

● The demand growth rate decelerates, often until growth in product demand approximates growth of the economy at large. New entrants are nonetheless attracted by the sales and profit success of early entrants. ● However, demand for the product at higher price levels has been satisfied, and the market becomes price sensitive. As a result, competitors focus on gaining market share to achieve production efficiencies. ● During this stage, profit peaks and then begins to decline as competition drives down prices. ● Individual companies may still enjoy market advantages, such as a dominant market share, which may be reinforced by a patent, copyright, or secret ingredient. ● Unless there are substantial innovations to rejuvenate market interest in the product, the industry tends to begin to consolidate, and a few dominant players emerge who succeed on the merits of brand awareness/ loyalty, scale economy, or both.

Why is it Important to Consider the Business Cycle When Evaluating a Company's Creditworthiness?

● Understanding business cycles and their implication enables the lender to answer three key questions: − Which companies are most susceptible to a downturn in the business cycle? − Which companies will anticipate, respond to, and manage the impact of economic cycles most effectively? − Which companies have financial conditions that are strong enough to withstand the effects of a business cycle downturn?

managerial questions

● What are the keys to this company's success (or the reasons it is failing)? ● What must it do well to grow and outperform the competition? ● How difficult has that been and how difficult do you think it will be in the future to outperform the competition? ● What events, both within and beyond its control, will significantly affect the company's operations?

Reason

● What has caused the request? ● Does the story make sense? ● Do you want to lend to a company that needs money for this reason?

questions can be asked to analyze the following expenses

● What is the nature of the activity resulting in the expense? ● Is the dollar amount in absolute terms and the percent relative to sales level typical for the customer and the industry? ● Is it expected that these expenses will increase/decrease in future periods, and why? ● How volatile are the costs for raw materials or personnel costs for certain skill sets? ● Is the stated expense category fixed or variable? ● Are the accounting methods for recording expenses consistent from period to period and with other companies within the industry?

Customer

● Who is the borrower? ● Does the company have multiple entities?

maturity stage examples

● Wired telecommunications carriers. ● Radio broadcasting. ● Fast food restaurants. ● Jewelry and watch wholesaling. ● Beer wholesaling. ● Funeral homes.