Capturing the Essence of Small Business Credit

Capturing the Essence of Small Business Credit:

1-day seminar for Branch Managers and Small Business Bankers

General Description

This one-day course is designed to communicate bank-specific credit values for bankers who are not credit specialists, including retail bankers and business bankers who have significant interface with commercial businesses, and who seek to strengthen their perspectives on the credit decision process and on soundness in commercial credit portfolios.

In this accelerated program, participants develop skills in capturing the “essence of the credit situation” and hone in on a set of standards for evaluating credit proposals and for assessing overall credit soundness. The course draws on case studies to reinforce key credit values, to illustrate the importance of getting behind the numbers, and to present a holistic framework for financial analysis.

Objectives

By successfully participating in this course, participants will:

Reinforce skills in analyzing and interpreting financial statements for commercial prospects and clients, including:

Identify critical financial issues.

Identify key questions.

Enhance skills in reaching a reasoned conclusion with respect to the company’s financial position.

Gain skills in getting “behind the numbers,” with emphasis on understanding the business strategy, and identifying and evaluating key factors which are driving the financial numbers including the cash flow.

Gain an understanding of the principles of credit soundness and the role of financial analysis in the context of those principles.

Preparation

Participants should have some general exposure to financial statements. For those with little exposure, it may be helpful to complete a basic course on financial analysis prior to enrolling in this class.

Topical Outline

The topical outline is presented on the following pages.

Topical Outline

Morning Session:

This session draws on the Hoover Optical case study which class participants read prior to class. This will be a facilitative case study discussion with the following key points:

Before “diving” into the numbers in detail, what is going on here? What is the purpose of the loan? Does it make business sense for the borrower? Are there any unusual features or risks for the Bank? Does it pass the “common sense” test?

What do the historical financials tell us? What are key points and important questions?

How will the bank be repaid? A high-level discussion of repayment sources ensues.

The qualitative factors – a discussion of the industry risks, business environment, management strength, and business strategy.

We spend approximately one hour in this discussion without looking at a single number. The class identifies the “positives” and “negatives.” At the end of the hour, a whole new insight emerges as to the level of risk in the credit. We make the point that these qualitative factors are the key drivers of future cash flow. This is always an “eye opening” discussion. At this stage, participants are gaining a fairly clear sense of the risk in the credit. There is high risk; the question still remains – do the financials show enough strength to weather the potential issues?

Getting “behind the numbers.” We look at some key numbers – debt/worth ratio and operating profit % sales – more closely and discover they don’t stand up to our scrutiny. Financial analysis cannot be superficial. We have to get behind the numbers and apply common sense tests.

 Through this case study a number of key principles about credit analysis emerge:

Both financial analysis and the qualitative analysis are important. Together they tell the story; one alone is incomplete.
Understand the purpose of the credit and the repayment source.
Focus on the business strategy.
Capture the essence of the credit situation.
Credit is very much about common sense.

Afternoon Session:

The afternoon session presents:

A holistic framework for financial analysis.

Two short financial analysis examples. For each statement, what issues do you see? What questions would you ask? What do you think of the financial situation overall? Why?

Case study – Rettig Packaging

Draw on case as the last financial analysis example.

Reinforce the juxtaposition of the financial situation and the qualitative factors.

This is an existing client – what should the bank do? The class participants will play the role of a new banker taking over this relationship. This is a wonderful example to compare and contrast with the morning case, in which the bank lost money. In this Rettig case, the Bank had over-extended the borrower. The new banker identified the issues, asked the right questions, made the right decisions, and retained the client.

Conclusion – participants will be asked what they will take from this session and how they will apply the takeaways on the job.