Finance & Cash Flow Management Presented by: Sahar El Damati

OUTLINES I- Banks follow a scientific approach to assess & evaluate any project in order to identify risks & structure credit facilities. II- Cash Flow is a Very important parameter in the assessment of the viability, strength of a project & more important tools for:- a.The determination of the cash needs. b. Debt service capabilities. III- Prior to presenting the applicability of the financials in the credit analysis, it is important to present a brief overview of all the important variables in the credit analysis.

Credit Analysis Is Composed Of:- I- Qualitative Analysis - Macro Analysis - Political Conditions - Macro Economic - Environment / Regulations - Industry Analysis - Legal Structure - Management - Asset conversion Cycle - Track Record

Credit Analysis Is Composed Of:- II- Quantitative Analysis - Spreading - Ratio Analysis - Cash Flow - Forecasting - Asset Valuation

Credit Analysis Is Composed Of:- III- Risk & Mitigants - Business & Financial Risks - SWOT analysis - Mitigants IV- Credit Structuring - Credit facilities parameters - Risks associated with credit structure - Structure pertaining to each industry

Major Economic Issues - GDP Growth - Economic Cycle - FX - Inflation - Recession - Unemployment - Liquidity - Government Deficit

Regulation - General / specific - Helpful / Constricting - Existing / potential - Effects of regulations on performance / cost

Regulation Environment - High Risk Hostile government regulations Highly regulated environment - Moderate Risk Mild government intervention Relatively regulated environment - Low Risk Friendly or protective regulations Minimum or no government intervention

Industry Risk Analysis Market Company Communications Goods & Services Money (Sales) Information Figure (1) A Simple Marketing System

FinanceProductionMarketingPersonnel Etc. Information Environment Information Management Strategic Process Strategy A Representation of a business system Input Output

- Demand Limited demand High demand - Competition Monopoly Oligopoly Moderately competitive Highly competitive - Market share Equal or above 40% From 25 to 40% Less than 10% Market share formulae

Introduction GrowthMaturity Decline Sales Volume Inventory Recovery Profits Time

Steps in industry analysis - Define borrower’s industry - Identify risks inherent in the industry - Assess effects of risk on borrower - Performance

Industry Characteristics - Cost structure - Industry maturity - Industry cyclicality - Dependence on other industries - Vulnerability to substitutes - Regulatory environment

Legal Structure - Law under which the company is established. - Importance of identifying shareholders. Financial support. Know how support. Marketing support. Management support. - Capital Authorized capital Issued capital Paid in

Ownership - Identify owners & understand commitment Structure or type of business organization Major shareholders and concentrations Privately held or traded on a stock exchange Range of share price, if traded Major changes in legal structure over the years and why - Identify sister companies Who are they What is the ownership structure What is the ownership structure What is line of business What is line of business

Line Of Business - Manufacturer / Trader What are the products / services sold What are the products / services sold Breakdown of products sold Breakdown of products sold Location of the business Location of the business Capacity of production Capacity of production Emphasis on original capacity Emphasis on original capacity Any increase which took place over the year Any increase which took place over the year Strategy for expansion & when Strategy for expansion & when - Contractor How long in business How long in business Line of business per contractor Line of business per contractor Maximum amount of acceptable projects Maximum amount of acceptable projects Track record Track record

Management - Goals and commitment - Organizational characteristics - Delegated authorities - Market reputation - Management systems / access to technology - Good qualified auditors - ISO, quality control

Asset Conversion Cycle Operating Cycle - What is it? - Components of ACC - Working investment concept - Seasonal WI - Permanent WI - Growth WI

Working Investment = (A/Cs Receivable + Inventory) (A/Cs Payable + Accrued expenses) Working investment Portion of trading assets that is not financed through spontaneous financing. Net Asset Investment that must be financed by either borrowed money or owner’s equity.

Asset Conversion Cycle Identification / Risk Cash Receivables Finished Goods (FG) Work in Progress (WIP) Raw Materials (RM)

Business Risk The uncertainty that management will be able to recover the costs invested in the asset conversion cycle.

Credit Analysis FSA & Cash Flow Objectives:- 1- Assess the performance of a company 2-Evaluate the asset management 3- Evaluate the capital structure & liquidity 4- Determine the financial risks 5- Determine the financial needs. 6- Determine company’s ability to meet current and future debt service and expansion needs. 7- Approximate cash inflows & outflows 8- Identify sources and uses of cash

Credit Analysis FSA & Cash Flow - Positive cash flow depends on Ability to complete ACC Ability to complete ACC Manage asset investment Manage asset investment Manage risks properly Manage risks properly Manage capital structure Manage capital structure

Forecasting - Critical tool for lending - Repayment depends on future performance, especially with term loans - Need to determine how much to lend, for how long and under what conditions - Best to use various scenarios

Objectives of Forecasting - Determine need & capacity to repay - Spot opportunities - Structure facilities - Set covenants - Establish basis for valuation

Purpose of LTL - Acquisitions - New plant (CAPEX) - Refinance existing debt - Finance growth

Analytical Emphasis - Quality is critical Consistency Consistency Stability predictability Stability predictability Mitigation of risks Mitigation of risks Reaction to recession Reaction to recession Ease of analysis Ease of analysis

Forecasting - Should be:- Logical Logical Reasonable Reasonable Defensible Defensible Historical consistent Historical consistent Related to management’s strategies Related to management’s strategies Reflective of industry & economic projections Reflective of industry & economic projections sensitized sensitized

Final Assessment - Purpose - Source of repayment - Risks - Protection against loss - Form of control

Purpose - Finance short term trading assets WI (WC) - Finance long term assets Permanent Permanent Capital expenditures Capital expenditures Investment activities Investment activities

Risks - Inability to generate cash Business risks Business risks Financial risks Financial risks - Inability of management To manage sources & uses of cash To manage sources & uses of cash

Protection - Stability of profits - Strong financial status of the company - Covenants to preserve cash flow & financial position of the company.