COMPREHENSIVE PROGRAMME CONTENT

Financial Accounting for Lending Bankers

SESSION 3:  Special situations and red flags and off-
FINANCIAL ANALYSIS – QUANTITATIVE RISKS balance sheet items
 Analysing the balance sheet
Unit Learning Aims and Objectives  Key analysis question formation and list
 Determine how to interpret the financial from the balance sheet – risk
statements for credit with a focus on identification
establishing the quantitative risks
 Ability to use financial ratios to obtain Income Statement and Statement of
additional insight to the financial Comprehensive Income
statements  Revenue model
 Ensure there is a sound understanding of  Revenue and receivables quality:
working capital and the impact on the – Ageing
business and the cash flow – Provisions
– collections
The Statement of Financial Position (Balance  Compound Annual Growth Rate (CAGR)
Sheet)  Cost structure:
The accounting equation – fixed and variable costs
 Structure of the balance sheet and salient – break-even analysis
features  Defining expenses
 Non-current assets  Comprehensive Income Statement
 Investments  Reading the footnotes in conjunction with
 Current assets: the income statement
– inventory – slow moving, different  Segment reporting
policies  Profitability:
– receivables – ageing, provisions, – gross margins
collections, working capital cycle and – operating margins
working investment cycle  Growth margins
 Non-current  Analysing the income statement
 Liabilities:  Benchmarking
– current – short-term – Key analysis question formation and
– non-current – long-term, depreciation list from the income statement – risk
methods identification
 Accruals and provisions
 Equity Statement of Cash Flows
 Investments:  Cash vs. accrual
– investments at cost of fair market  Direct and indirect cash flow statement
value  The structure and content of the cashflow
– associate companies statement:
– subsidiaries and consolidated financial – operating cash flow
statements – investing cash flow
 Goodwill – financing cash flow
 Reading the footnotes in conjunction with  Analysing the cash flow statement
the balance sheet  How to use the cash flow statement for
projections

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 Cash flow calculations
 Financial ratios and the statements of
cash flows
 Relationship of income and cash flows
 Free cash flow
 How to use the cash flow statement to
quantify debt capacity – Debt Service
Cover Ratio (DSCR)
Ratio Analysis
 Ratios used in operating performance and
profitability:
– turnover
– EBITDA
– net working capital
– cash flow
 Ratios used in capital structure:
– leverage vs. gearing
– debt coverage ratios
– –discretionary vs. non-discretionary
– off-balance sheet funding inclusions
 Asset efficiency ratios
 Credit ratios: liquidity, solvency and fixed
charge coverage
 Capital return ratios (Return on Capital
Employed vs. Return on Equity)
 Du pont ratio analysis (Profitability,
Efficiency and Leverage)
 Interpretation of ratios, what each ratio is
really telling
 When are ratios useful
 What are their limitations
 Trend analysis
 Industry comparisons
 Key analysis question formation and list
from the cash flow statement – risk
identification
Working Capital
 The working capital cycles
 The link of the working capital cycle with
liquidity and cash flow
 Ratios which are relevant to working
capital
 Working capital vs. working investment
 The structure for financing working capital
 Factors influencing working capital:
– demand and supply
– change in volumes
– price changes
– trade terms
 Potential risks in working capital:
– overtrading
– Diversion risk
– Poor financial management
– Inflation Risk
– Inadequate project planning
– Inadequate profitability
– Poor structuring
– Contingencies
– Risk mitigants in working capital.
SESSION 4:
CASH FLOW FORECASTING AND
CASH FLOW DYKNAMICS
Session Learning Aims and Objectives
 Learn how to project and forecast the
financial statements – using concepts in
earlier sessions
 Understand that cash flow pays back the
loan – incorporating the business model
to the cash flow forecasts established and
the ability of the borrower to pay back the
loan
SESSION CONTENT
Projections and Forecasts
 Tools for projecting financial statements
 Defining assumptions
 Which dependent variables do we want to
project
 Projecting the income statement
 Seasonality
 Using value drivers to make decisions on
future business profile
 The key cash drivers
 Forecasting cash flows
 Looking at historical cash flows as basis
for future cash flow
 Forecasting the balance sheet
 Assessing a company’s financing needs
 Working capital projections
 New funding requirement and
affordability
 Ratios in projections
 Sensitivity analysis – adjusting critical
assumptions and value drivers
Projections
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 Limitations on the information provided
through financial accounts
 Understanding the reliability of financial
data
 The five cash drivers:
– profits – profitability ratios, sales
growth, gross margin, operating
margin, interest cover ratios, return
on capital employed
– asset cash conversion cycle – sales
volume and growth, accounts
receivable days, inventory days,
accounts payable days
– capital expenditure – mandatory,
maintenance and discretionary (and
why discretionary often isn’t), delays,
cost overruns, completion risk, FX
risks, use of the asset turn ratio
– equity – access to equity capital,
dividend policy, leverage ratios
– debt – access to debt capital,
maturity profile and cash flow
subordination issues, contingent
exposures, leverage ratios,
current and quick ratios
– key balance sheet and income
statement ratios
 Direct and indirect presentations of
cashflows – variety of cash flow
statements to be assessed and
analysed; approaches to cash flow
calculation and interpretation
 Different cash flow definitions – FFO,
RCF, FCF, RCF, levered and unlevered
cash flow measures
 Methodology for assessing corporate
projections and/or to prepare them
for less sophisticated clients:
– background to projections
– projection methodology
– setting meaningful forecast
assumptions for growth, margins
and financing requirements
– determine assumption set and
forecast he 5 cash drivers and
debt service capacity for the next
two years