Commercial Lending

Principles and Practice

Adrian Cudby

• Publisher: Kogan Page
• Year: 2018
• ISBN:
  9780749482787
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Endorsed by the Chartered Banker Institute as core reading for one of the modules leading to the Institute's professional qualifications and chartered status, Commercial Lending supports readers that wish to develop their ability to analyze the creditworthiness of a customer and their business in the context of the current economic climate, future market and sector expectations. Commercial Lending uses a series of practical exercises and case studies, and provides the tools needed for the reader to understand and appraise a customer's business strategy. This will then enable the reader to provide appropriate funding solutions to meet the commercial needs of customers while reflecting the bank's risk appetite. These tools include: how to assess the performance and creditworthiness of a business; how to critically evaluate the robustness of cash flow; and how to undertake sensitivity analysis to quantify sustainable debt repayment capacity. This practical text will present a critical analysis of financial and non-financial information to help readers identify key risks inherent in the customer's lending proposition. Readers will go on to propose suitable funding solutions that mitigate risk and meet the needs of customer and bank. Online supporting resources include a glossary and updates to regulation in the UK.All law and legislation used throughout the book (Chapters 1, 6 and 9) is either UK or English law. Readers outside the UK are recommended to check the appropriate legislation in their country.The currency used throughout the book is UK Sterling (denominated by £ symbol) and where working examples are used (particularly in Chapters 2 and 3) readers can substitute their own currency by using the appropriate exchange rate for their own country.

03

Cash analysis

INTRODUCTION

Cash is the ‘lifeblood’ of any commercial business and the management of the cash position is vital for its survival. As we will demonstrate in Chapter 9, the consequences of a lack of cash or liquidity will often be fatal and in many cases will lead to the demise of the business. Bankers are often concerned about the profits within a business, which is important, but profit is not the same as cash, and many profitable businesses can be ‘cash poor’.

In this chapter we will be exploring not only how important cash is to a business but the various ways that bankers will analyse the cash within a business. Some of the techniques we will explore are forward looking, such as cash flow projections, whereas others will be more backward looking such as the cash flow available for debt service calculation, which takes into account the profits generated by a business, and then considers how this cash has been utilized between two accounting periods. The movements of the key working capital elements will be discussed as it is important for you to understand the dynamics of working capital movements and the overall impact on the cash position.

LEARNING OBJECTIVES

By the end of this chapter, you will be able to:

• explain the importance of focusing on cash in a commercial business;
• evaluate how the movements of trade receivables, trade payables and inventory impact on the cash position in a commercial business;
• analyse a c...