Bank Management, 5th edition.
Timothy W. Koch and S. Scott MacDonald
Copyright © 2003 by South-Western, a division of Thomson Learning
EVALUATING
COMMERCIAL
LOAN REQUEST
Chapter 16
Two types of errors in judgment:
 Type I Error
 Making
a loan to a customer who will
ultimately default
 Type II Error
 Deny
a loan to a customer who would
ultimately repay the debt.
Five key questions/issues:
1.
2.
3.
4.
5.
What is the character of the borrower and
the quality of information provided?
What are the loan proceeds going to be
used for?
How much does the customer need to
borrow?
What is the primary source of repayment
and when?
What collateral is available ?
(Secondary source of repayment)
Four steps in evaluating credit requests
1. Overview of management and
operations
2. Spread the financials
3. Cash flow analysis
4. Pro forma projections and analysis
Overview of management and operations
 Gather information on:
 Business
and related industry
 Management quality
 Nature of loan request
 Quality of the data
Spread the financials
 Spread the financials and compute
common size
 Compare
with industry averages
 Calculate a series of financial
ratios that indicate performance
and risk
 Compare
with industry averages
Exhibit 16.3 Wades Office Furniture - Income Statement
Wades Office Furniture
Unaudited: , SIC #2522
INCOME STATEMENT
[- H I S T O R I C A L -]
1999
% of
% Cha $ 1,000 Total
[- H I S T O R I C A L -]
2000
% of
% Cha $ 1,000 Total
[- H I S T O R I C A L -]
2001
% of
% Cha $ 1,000 Total
Net sales
Cost of goods sold
Gross profit
#N/A
#N/A
#N/A
7,571 100.0%
8.10%
5,089 67.2%
6.58%
2,482 32.8% 11.20%
8,184 100.0%
5,424 66.3%
2,760 33.7%
51.88% 12,430 100.0%
52.19% 8,255 66.4%
51.27% 4,175 33.6%
Selling expenses
Management salaries
General & administrative expenses
Research and development expenses
Depreciation & amortization
Other operating expenses
Total operating expenses
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
906
0
1,019
0
70
0
1,995
1,026
0
1,211
0
71
0
2,308
12.5%
0.0%
14.8%
0.0%
0.9%
0.0%
28.2%
58.67%
0.00%
39.47%
0.00%
2.82%
0.00%
46.88%
1,628
0
1,689
0
73
0
3,390
13.1%
0.0%
13.6%
0.0%
0.6%
0.0%
27.3%
#N/A
487
452
5.5%
73.67%
785
6.3%
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
0
0
141
0
63
0
(204)
0.0%
0.00%
0.0%
0.00%
1.9% -15.60%
0.0%
0.00%
0.8% 36.51%
0.0%
0.00%
-2.7%
0.49%
0
0
119
0
86
0
(205)
0.0%
0.0%
1.5%
0.0%
1.1%
0.0%
-2.5%
0.00%
0.00%
31.93%
0.00%
17.44%
0.00%
25.85%
0
0
157
0
101
0
(258)
0.0%
0.0%
1.3%
0.0%
0.8%
0.0%
-2.1%
#N/A
283
3.7% -12.72%
247
3.0% 113.36%
527
4.2%
Income taxes
Extraordinary and other income (exp.)
Net income
#N/A
#N/A
#N/A
100
0
183
1.3%
0.0%
2.4%
-5.00%
0.00%
-16.9%
95
0
152
1.2%
0.0%
1.9%
97.89%
0.00%
123.0%
188
0
339
1.5%
0.0%
2.7%
Dividends
Retained earnings
#N/A
#N/A
0
183
0.0%
0.00%
2.4% -16.94%
0
152
0.0%
0.00%
1.9% 123.03%
0
339
0.0%
2.7%
Operating profit
Interest on marketable securities
Income on long term investments
Interest expense - Bank Notes
Interest expense - Term notes + LTD
All other expenses
All other income
Total All Other Income (Expenses)
Profit before taxes
12.0% 13.25%
0.0%
0.00%
13.5% 18.84%
0.0%
0.00%
0.9%
1.43%
0.0%
0.00%
26.4% 15.69%
6.4%
-7.19%
Wades Office Furniture: Historical Balance Sheet (Assets)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
[- H I S T O R I C A L -] [- H I S T O R I C A L -] [- H I S T O R I C A L -]
1999
% of
2000
% of
2001
% of
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
ASSETS
Cash
Marketable securities
Accounts receivable
Inventory
Prepaid expenses
Deferred tax asset
Other current assets
Current assets
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
141
0
1,254
1,160
47
0
0
2,602
Gross fixed assets
Leasehold improvements
Less accumulated dep.
Net fixed assets
#N/A
#N/A
#N/A
#N/A
629
198
206
621
Notes & contracts receivable
Long-term investments
Intangible assets
Other noncurrent assets
Total Assets
#N/A
#N/A
#N/A
#N/A
#N/A
4.3% -5.67%
133
0.0% 0.00%
0
38.4% 11.56% 1,399
35.6% 3.88% 1,205
1.4% 6.38%
50
0.0% 0.00%
0
0.0% 0.00%
0
79.7% 7.11% 2,787
3.9%
0.0%
40.8%
35.2%
1.5%
0.0%
0.0%
81.4%
19.3% 7.15%
6.1% 2.02%
6.3% 34.47%
19.0% -3.54%
19.7%
5.9%
8.1%
17.5%
674
202
277
599
-45.86%
72
0.00%
0
35.53% 1,896
46.39% 1,764
-70.00%
15
0.00%
0
0.00%
0
34.45% 3,747
17.36%
17.82%
24.91%
14.02%
791
238
346
683
1.6%
0.0%
42.3%
39.4%
0.3%
0.0%
0.0%
83.6%
17.7%
5.3%
7.7%
15.2%
0
0.0% 0.00%
0
0.0% 0.00%
0
0.0%
0
0.0% 0.00%
0
0.0% 0.00%
0
0.0%
40
1.2% -2.50%
39
1.1% 28.21%
50
1.1%
0
0.0% 0.00%
0
0.0% 0.00%
0
0.0%
3,263 100.0% 4.96% 3,425 100.0% 30.80% 4,480 100.0%
Wades Office Furniture: Historical Balance Sheet (Liabilities and Equity)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
[- H I S T O R I C A L -] [- H I S T O R I C A L -] [- H I S T O R I C A L -]
1999
% of
2000
% of
2001
% of
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
LIABILITIES & EQUITY
Notes payable - bank
Accounts payable
Accrued expenses
Income tax payable
Current maturity - Term notes
Current maturity - LTD
Other current liabilities
Current liabilities
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
643
836
205
41
0
75
0
1,800
19.7% -9.49%
582
25.6% 8.61%
908
6.3% 25.85%
258
1.3% 51.22%
62
0.0% 0.00%
0
2.3% 0.00%
75
0.0% 0.00%
0
55.2% 4.72% 1,885
17.0%
26.5%
7.5%
1.8%
0.0%
2.2%
0.0%
55.0%
53.26%
892
41.19% 1,282
34.88%
348
27.42%
79
0.00%
0
0.00%
75
0.00%
0
41.96% 2,676
19.9%
28.6%
7.8%
1.8%
0.0%
1.7%
0.0%
59.7%
Deferred tax liability
Term notes
Long-term debt (LTD)
Other noncurrent liabilities
Total liabilities
#N/A
#N/A
#N/A
#N/A
#N/A
0
0
450
0
2,250
0.0% 0.00%
0
0.0% 0.00%
0
13.8% -16.7%
375
0.0% 0.00%
0
69.0% 0.44% 2,260
0.0% 0.00%
0
0.0% 0.00%
0
10.9% -20.00%
300
0.0% 0.00%
0
66.0% 31.68% 2,976
0.0%
0.0%
6.7%
0.0%
66.4%
Common stock - par
#N/A
Paid-in surplus
#N/A
Preferred stock
#N/A
Treasury and other equities
#N/A
Retained earnings
#N/A
Stockholder's equity
#N/A
Total Liabilities and Equity
#N/A
600 18.4% 0.00%
600 17.5% 0.00%
600 13.4%
100
3.1% 0.00%
100
2.9% 0.00%
100
2.2%
0
0.0% 0.00%
0
0.0% 0.00%
0
0.0%
0
0.0% 0.00%
0
0.0% 0.00%
0
0.0%
313
9.6% 48.56%
465 13.6% 72.90%
804 17.9%
1,013 31.0% 15.00% 1,165 34.0% 29.10% 1,504 33.6%
3,263 100.0% 4.96% 3,425 100.0% 30.80% 4,480 100.0%
Ratio analysis
 Liquidity and activity ratios
 Leverage ratios
 Profitability ratios
Liquidity and activity ratios
 Net Working Capital = CA - CL
 Current Ratio = CA / CL
 Quick Ratio = (Cash + A/R) / CL
 Days Cash = Cash / Avg. daily sales
 Inventory Turnover = COGS / Avg. Inv.
 AR Collection (Days A/R) = (A/R) / Avg. daily sales
 Days Cash to Cash
= Days Cash + Days A/R + Days inventory
 Days Payable Outstanding =AP / Avg. daily pur.
= AP / [(COGS + DInventory) / 365]
 Sales to net fixed assets = Sales / Net fixed assets
Wades Office Furniture: Liquidity Ratios
Wades Office Furniture
[- H I S T O R I C A L -] [- H I S T O R I C A L -]
Unaudited: , SIC #2522
FINANCIAL RATIOS
[- H I S T O R I C A L -]
1999
2000
2001
$ 1,000
$ 1,000
$ 1,000
Liquidity Ratios
Current Ratio
Quick Ratio
Days Cash
Accounts Receivable Turnover
Inventory Turnover
Days AP Outstanding
Days Cash to Cash Cycle
Est. W.C. financing Needs
Memo: COGS / Accounts payable
1.45
0.78
Days Times
6.80 53.70 x
60.46 6.04 x
83.20 4.39 x
48.83 7.47 x
101.62 3.59 x
$1,417
6.09 x
1.48
0.81
Days Times
5.93 61.53 x
62.39 5.85 x
81.09 4.50 x
60.60 6.02 x
88.81 4.11 x
$1,320
5.97 x
1.40
0.74
Days Times
2.11 172.64 x
55.67
6.56 x
78.00
4.68 x
53.09
6.88 x
82.70
4.41 x
$1,870
6.44 x
Leverage ratios
 Debt Ratio = Debt / Total assets
 Debt to tangible net worth = Debt / Tang. NW
 Times interest earned = EBIT / Int. exp.
where,
EBIT = Earns before tax plus int. exp.
 Fixed Charge Coverage
= (EBIT+lease pay) / (Int. exp.+ lease pay)
 Net Fixed Assets to Tangible NW
 Dividend Payout %
= Dividends paid / Net profit
Wades Office Furniture: Leverage Ratios
Wades Office Furniture
Unaudited: , SIC #2522
FINANCIAL RATIOS
[- H I S T O R I C A L -] [- H I S T O R I C A L -]
[- H I S T O R I C A L -]
1999
2000
2001
$ 1,000
$ 1,000
$ 1,000
Leverage Ratios
Debt to Tangible Net Worth
2.31 x
Times Interest Earned
3.01 x
Fixed Charge Coverage
1.96 x
Net Fixed Assets to Tangible Net Worth
63.82%
Dividend Payout
0.00%
2.01 x
3.08 x
1.79 x
53.20%
0.00%
2.05 x
4.36 x
2.09 x
46.97%
0.00%
Profitability ratios
 Return on Equity (ROE)
= Net income / Total equity

Profit before taxes to net worth
= Profit before taxes / Tangible net worth
 Return on Assets (ROA) = Net income / Total assets

Profit before taxes to total assets
= Profit before taxes / Total assets
 Asset utilization (AU)= Sales / Total assets
sometimes referred to as asset turnover
 Profit margin (PM) = Net income / Sales
 Sales growth =
DSales / Last period’s sales
 Income taxes to profit before taxes
= Reported income tax / Profit before taxes
Wades Office Furniture: Profitability Ratios
Wades Office Furniture
[- H I S T O R I C A L -] [- H I S T O R I C A L -]
Unaudited: , SIC #2522
FINANCIAL RATIOS
[- H I S T O R I C A L -]
1999
2000
2001
$ 1,000
$ 1,000
$ 1,000
Profitability Ratios
Return on Net Worth (ROE)
Profit Before Taxes to Net Worth
Return on Assets (ROA)
Profit Before Taxes to TA
Equity mult (leverage = TA / TE)
18.07%
29.09%
5.61%
8.67%
3.22 x
13.05%
21.94%
4.44%
7.21%
2.94 x
22.54%
36.24%
7.57%
11.76%
2.98 x
2.32 x
0.00%
2.39 x
0.00%
2.77 x
0.00%
Expenses
Net profit margin (NI / net sales)
2.42%
COGS / net sales
67.22%
Operating expenses / net sales
26.35%
Income Taxes to Earnings Before Taxes
35.34%
1.86%
66.28%
28.20%
38.46%
2.73%
66.41%
27.27%
35.67%
Sales / Net Fixed Assets
13.66 x
18.20 x
Income
Tot. asset turnover (sales / TA)
All other income / total assets
12.19 x
Cash flow analysis:
Cash pays a loan not net income
 Cash
Assets
n
m
 DA  DL
i 1
i
j1
j
 DNW
 Let A1
= Cash,
then:
m
n
DA1   DL j   DAi  DNW
j1
i 2
 Let DNW
= Dstock
+ Dsurplus + NI - DIV
m
n
DA1   DL j   DAi  Dstock + Dsurplus + NI - DIV
j1
i 2
m
n
j1
i 2
 Let NI = Revenues - Expenses - Taxes
DA1   DL j   DAi  Dstock + Dsurplus
+ Revenues - Expenses - Taxes - DIV
Sources and uses of cash
m
n
j1
i 2
DA1   DL j   DAi  Dstock + Dsurplus
+ Revenues - Expenses - Taxes - DIV
 Sources of cash are:
 Increase in any liability
 Decrease in any non-cash asset
 New issues of stock
 Additions to surplus
 Revenues
 Uses of cash are:
 Decrease in any liability
 Increases in any non-cash assets
 Repayment / refunding of stock
 Deductions from surplus
 Cash expenses, taxes, dividends
Understanding sources and uses
 Assets are a use of cash:
 -(At - At-1)
 Liabilities are a source of cash:
 +(Lt - Lt-1)
 Revenues are a source of cash:
 +Revenues
 Expenses are a use of cash:
 -Expenses
 Just sum up each part
There are two types of cash flow statements
1. Direct


Converts the income statement into a
“cash based income statement.”
Begins with net sales and adjust for
changes in balance sheet items.
2. Indirect

Adjusts net income for non-cash
charges and changes in balance
sheet items.
Four sections in either cash flow statement.
1.
Operations

2.
Investing

3.
Includes all long term assets
Financing

4.
Includes income statement items and all
current assets and current liabilities.
Includes all long term liabilities and equity
(except retained earnings) plus dividends
paid.
Cash

Total of the above, but must equal the
actual change in cash and marketable
securities.
Converting the income statement into a
cash based income statement
1.

Operating:
Cash sales:




+ Net Sales
- D Accounts receivables
= Cash sales
Cash purchases (negative value):





- COGS
- DInventory
+ DAccounts payable
= Cash purchases
= Cash gross margin
Converting the income statement into a
cash based income statement (continued)
Operating (continued):
 Cash operating expenses (negative value):





- Operating expenses
+ Non-cash charges (dep. and amortization.)
- D Prepaid expenses
+ D Accruals
= Cash operating expenses
 Other expenses and taxes:
 - Other expenses + Other income
 - Reported taxes
 + D Income tax payables and deferred inc. tax
 = Other expenses and taxes
 = Cash flow from operations (CFO)
Cash based income statement (cont.)
2. Investing:
 - Capital Exps. = DNet fixed assets + depreciation
 - DOther long term assets

= Cash used for Investing.
3. Financing:
 - Payments for last periods current maturity debt
 - Payments for dividends

= Payments for financing
 + DDebt + EOP CM debt
 + New stock issues

= External Financing
4. = Change in cash and marketable securities
Wades Office Furniture[- H I S T O R I C A [-L H-] I S T O R I C A [-L H-] I S T O R I C A L -]
Unaudited: , SIC #2522
CASH BASED INCOME STATEMENT
Wades Cash Flow from Operations
Net sales
Change in accounts receivable
Cash receipts from sales
Cost of goods sold
Change in inventory
Change in accounts payable
Cash purchases
Cash margin
Total operating expenses
Depreciation & amortization
Change in prepaid expenses
Change in accruals
Change in other current assets & liab.
Cash operating expenses
Cash operating profit
1999
2000
2001
$ 1,000
$ 1,000
$ 1,000
7,571
#N/A
#N/A
8,184
(145)
8,039
12,430
(497)
11,933
(5,089)
#N/A
#N/A
#N/A
(5,424)
(45)
72
(5,397)
(8,255)
(559)
374
(8,440)
2,642
3,493
(2,308)
71
(3)
53
0
(2,187)
(3,390)
73
35
90
0
(3,192)
#N/A
(1,995)
70
#N/A
#N/A
#N/A
#N/A
#N/A
455
301
Interest on marketable securities
Income on long term investments
All other expenses & income (net)
Cash before interest & taxes
0
0
(63)
#N/A
0
0
(86)
369
0
0
(101)
200
Interest expense - Bank notes
Interest expense - Term notes and LTD
Income taxes reported
Change in income tax payable
Change in deferred income taxes
(141)
0
(100)
#N/A
#N/A
(119)
0
(95)
21
0
(157)
0
(188)
17
0
Cash flow from operations (CFO)
#N/A
176
(128)
Wades Office Furniture[- H I S T O R I C A [-L H-] I S T O R I C A [-L H-] I S T O R I C A L -]
Wades Cash Flow Statement (investing, financing and cash Sections).
Unaudited: , SIC #2522
CASH BASED INCOME STATEMENT
1999
2000
2001
$ 1,000
$ 1,000
$ 1,000
Cash flow from operations (CFO)
#N/A
176
(128)
Capital exp. and leasehold improvements
Change in long-term investments
Change in intangible assets
Change in other noncurrent assets
Cash Used for Investments
#N/A
#N/A
#N/A
#N/A
#N/A
(49)
0
1
0
(48)
(157)
0
(11)
0
(168)
Payment for last period's CM Term note
Payment for last period's CMLTD
Dividends paid (DIV)
Payments for financing
#N/A
#N/A
0
#N/A
0
(75)
0
(75)
0
(75)
0
(75)
#N/A
53
(371)
Change in short-term bank debt
Change in term notes & EOP CM term notes
Change in LT debt + EOP CMLTD
Change in stock & surplus
Change in preferred stock
Change in treasury and other equities
Change in other noncurrent liabilities
External financing
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
(61)
0
0
0
0
0
0
(61)
310
0
0
0
0
0
0
310
Extraordinary exp. and cha. In acct. prin.
Current period accounting adjustment
0
(130)
0
0
0
0
#N/A
(8)
(61)
#N/A
(8)
(61)
Cash before external financing
Change in cash & mktbl securities
Actual change in cash
Projections of financial condition
 Pro Forma projections of the borrowers
condition reveal:



How much financing is required.
When the loan will be repaid.
Use of the loan.
 Pro Forma Projections


Determine critical and non critical
assumptions.
Use industry projections, internal projections
and judgment to determine sales projections.
Pro Forma: Income Statement
 Sales2002
= Sales2001 x (1 + gsales)
= $12,430 x (1 + 0.20) = $14,916
 COGS2002
= Sales2002 x COGS % of Sales
= $14,916 x 0.68 = $10,143
 Sell. Exp2002 = Sales2002 x Selling Exp. % of Sales
= $14,916 x 0.13 = $1,939
 G&A Exp2002 = Sales2002 x G&A Exp. % of Sales
= $14,916 x 0.122 = $1,820
 Int. Exp2002
= (Bank debt2002 x rate on bank debt)
+ (L.T. debt2002 x rate on L.T. debt)
= $697 x 0.145
+ [($75 + $50 + $350 + $225) x 0.09]
= $186
Pro Forma: Balance Sheet (Assets)
Associate balance sheet items with sales.
 AR2002
= Days A/R x Average Daily Sales2002
= 50
x ($14,916 / 365) = $2,043
 Inventory2002 = COGS2002 / Inventory turnover
= $10,143 / 4.9 = $2,070
Capital expenditures from the capital budget:
 Gross fixed (GFA)2002 = GFA2001 + Cap. Exp.2002
= $791
+ $400 = $1,191
 Accumulated depreciation2002
=Acc. Dep.2001 + depreciation exp.2002
= $346
+ $110 = $973
Determine appropriate turnover rates from historical
trends or industry averages.
Pro Forma: Balance Sheet (Liabilities)
Trade credit may be tied to inventory growth, thus
accounts payable tied to inventory growth:
AP2002 = Days AP x Avg. Daily purchases2002
= Days AP x ((COGS2002 + DInv.2002) / 365)
= 53
x ($10,143 + ($2,070 – $1,764) / 365)
= $1,517
Principal payments on debt can be obtained from the
capital budget:
LTD2002 = LTD2001 + New LTD2002 – CM LTD2002
= $300 + $0
– $75
= $225
Term notes (TN)2002 = TN2001 + New TN2002 – CM TN2002
= $0 + $400
– $50
= $350
Note: CM = Current maturity
Pro Forma: Balance Sheet (Equity)
Balance sheet definitions:
 Retained earnings (RE)2002
= RE2001 + (NI2002 – Div.2002) + Acct Adjust.
= $804 + ($339 – $0)
+0
= $1,893
 Stock2002 = Stock2001 + New stock issues
Note: an accounting adjustment is only
needed when adjustments have been made
to retained earnings.
Pro Forma: Determining the “Plug Figure”
Sales growth will determine growth in
receivables, inventory and profit.
 Net Income varies directly with sales in a stable
environment.
The difference in projected asset base and total
funding without new debt determines additional credit
needed or the Plug figure.


When Assets2002 > (Liabilities2002 + Net worth2002)
→Additional financing is required (notes payable plug):

Notes payable2002 = A2002 – (L2002 + NW2002)
When Assets2002 < (Liabilities2002 + Net worth2002)
→ Surplus cash, invest (marketable securities (plug):
Mkt. securities 2002 = – (A2002 – (L2002 + NW2002))
Wades financial projections assumptions:
Most likely circumstances, income statement










Sales increase by 20 percent annually.
Cost of goods sold equals 68 percent of sales.
Selling expenses average 13 percent of sales,
G&A expenses average 12.2 percent of sales
Depreciation equals $110,000 annually.
Noninterest expense equals $110,000 in 2002 and
$135,000 in 2000.
Interest expense equals 14.5 percent of bank debt
and 9 percent of other long-term debt.
Income taxes equal 36 percent of earnings before
taxes
Income tax payable increases annually by the rate
of change in 2001.
No dividends are paid.
Wades financial projections assumptions:
Most likely circumstances, balance sheet
 A/R collection improves to:







50 in 2002 and 46 in 2000.
Inventory turnover increases to:
4.9 in 2002 and 5.1 times in 2000.
Days AP outstanding remains constant at 53.
Prepaid expenses increase by $5,000
Accruals increase by $20,000 annually.
$400,000 is loaned to purchase new equipment, with
the principal repaid in 8 equal annual installments.
 depreciation on the new equip. $40,000, while
depreciation on old will be $70,000 per year.
The minimum cash required is $120,000.
Other assets remain constant at $50,000.
Pro forma Projections: Wades Office Furniture, Income Statement
Wades Office Furniture
Unaudited: , SIC #2522
INCOME STATEMENT
Net sales
Cost of goods sold
Gross profit
[- H I S T O R I C A L -]
2001
% of
% Cha $ 1,000 Total
[-- P R O F O R M A --] [-- P R O F O R M A --] [2002
% of
2003
% of
% Cha $ 1,000 Total % Cha $ 1,000 Total
51.88% 12,430 100.0% 20.00% 14,916 100.0% 20.00% 17,899 100.0%
52.19% 8,255 66.4% 22.87% 10,143 68.0% 20.00% 12,171 68.0%
51.27% 4,175 33.6% 14.33% 4,773 32.0% 20.00% 5,728 32.0%
Selling expenses
58.67%
Management salaries
0.00%
General & administrative expenses 39.47%
Research and development expenses0.00%
Depreciation & amortization
2.82%
Other operating expenses
0.00%
Total operating expenses
46.88%
1,628
0
1,689
0
73
0
3,390
13.1% 19.11%
0.0% 0.00%
13.6% 7.74%
0.0% 0.00%
0.6% 50.68%
0.0% 0.00%
27.3% 14.12%
1,939
0
1,820
0
110
0
3,869
785
6.3% 15.20%
904
6.1%
22.43%
0
0
157
0
101
0
(258)
0.0% 0.00%
0.0% 0.00%
1.3% -35.62%
0.0% #N/A
0.8% 8.91%
0.0% 0.00%
-2.1% 14.76%
0
0
101
85
110
0
(296)
0.0%
0.0%
0.7%
0.6%
0.7%
0.0%
-2.0%
0.00%
0.00%
-48.49%
-16.47%
22.73%
0.00%
-12.84%
0
0
52
71
135
0
(258)
0.0%
0.0%
0.3%
0.4%
0.8%
0.0%
-1.4%
113.36%
527
4.2% 15.41%
608
4.1%
39.60%
849
4.7%
Income taxes
97.89%
Extraordinary and other income (exp.)0.00%
Net income
123.0%
188
0
339
1.5% 16.46%
0.0% 0.00%
2.7% 14.8%
219
0
389
1.5% 39.60%
0.0% 0.00%
2.6% 39.6%
306
0
543
1.7%
0.0%
3.0%
Dividends
Retained earnings
0
339
0.0% 0.00%
2.7% 14.82%
0
389
0.0% 0.00%
2.6% 39.60%
0
543
0.0%
3.0%
Operating profit
73.67%
Interest on marketable securities
0.00%
Income on long term investments
0.00%
Interest expense - Bank Notes
31.93%
Interest expense - Term notes + LTD 0.00%
All other expenses
17.44%
All other income
0.00%
Total All Other Income (Expenses) 25.85%
Profit before taxes
0.00%
123.03%
13.0% 20.00%
0.0% 0.00%
12.2% 20.00%
0.0% 0.00%
0.7% 0.00%
0.0% 0.00%
25.9% 19.43%
2,327
0
2,184
0
110
0
4,621
13.0%
0.0%
12.2%
0.0%
0.6%
0.0%
25.8%
1,107
6.2%
Pro forma Projections: Wades Office Furniture Balance Sheet (Assets)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
[- H I S T O R I C A L -] [-- P R O F O R M A --] [-- P R O F O R M A --]
2001 % of
2002
% of
2003
% of
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
ASSETS
Cash
Marketable securities
Accounts receivable
Inventory
Prepaid expenses
Deferred tax asset
Other current assets
Current assets
-45.86%
72
0.00%
0
35.53% 1,896
46.39% 1,764
-70.00%
15
0.00%
0
0.00%
0
34.45% 3,747
1.6%
0.0%
42.3%
39.4%
0.3%
0.0%
0.0%
83.6%
Gross fixed assets
Leasehold improvements
Less accumulated dep.
Net fixed assets
17.36%
17.82%
24.91%
14.02%
17.7% 50.57% 1,191
5.3% 0.00%
238
7.7% 31.79%
456
15.2% 42.46%
973
791
238
346
683
66.67%
120
0.00%
0
7.77% 2,043
17.35% 2,070
33.33%
20
0.00%
0
0.00%
0
13.51% 4,253
2.3%
0.0%
38.7%
39.2%
0.4%
0.0%
0.0%
80.6%
0.00%
120
0.00%
0
10.40% 2,256
15.29% 2,387
25.00%
25
0.00%
0
0.00%
0
12.56% 4,787
2.1%
0.0%
39.6%
41.9%
0.4%
0.0%
0.0%
84.0%
22.6% 0.00% 1,191
4.5% 0.00%
238
8.6% 24.12%
566
18.4% -11.31%
863
20.9%
4.2%
9.9%
15.1%
Notes & contracts receivable 0.00%
0
0.0% 0.00%
0
0.0%
Long-term investments
0.00%
0
0.0% 0.00%
0
0.0%
Intangible assets
28.21%
50
1.1% 0.00%
50
0.9%
Other noncurrent assets
0.00%
0
0.0% 0.00%
0
0.0%
Total Assets
30.80% 4,480 100.0% 17.77% 5,276 100.0%
0.00%
0
0.0%
0.00%
0
0.0%
0.00%
50
0.9%
0.00%
0
0.0%
8.04% 5,700 100.0%
Pro forma Projections: Wades Balance Sheet (Liabilities and Equities)
Wades Office Furniture
Unaudited: , SIC #2522
BALANCE SHEET
[- H I S T O R I C A L -] [-- P R O F O R M A --] [-- P R O F O R M A --]
2001
% of
2002
% of
2003
% of
% Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
LIABILITIES & EQUITY
Notes payable - bank
53.26%
892
Accounts payable
41.19% 1,282
Accrued expenses
34.88%
348
Income tax payable
27.42%
79
Current maturity - Term notes 0.00%
0
Current maturity - LTD
0.00%
75
Other current liabilities
0.00%
0
Current liabilities
41.96% 2,676
19.9% -21.85%
28.6% 18.35%
7.8% 5.75%
1.8% 27.42%
0.0% #N/A
1.7% 0.00%
0.0% 0.00%
59.7% 4.93%
697
1,517
368
101
50
75
0
2,808
13.2% -48.49%
28.8% 19.52%
7.0% 5.43%
1.9% 27.42%
0.9% 0.00%
1.4% 0.00%
0.0% 0.00%
53.2% 0.20%
359
1,813
388
128
50
75
0
2,814
6.3%
31.8%
6.8%
2.3%
0.9%
1.3%
0.0%
49.4%
Deferred tax liability
0.00%
0
Term notes
0.00%
0
Long-term debt (LTD)
-20.00%
300
Other noncurrent liabilities
0.00%
0
Total liabilities
31.68% 2,976
0.0% 0.00%
0.0% #N/A
6.7% -25.00%
0.0% 0.00%
66.4% 13.68%
0
350
225
0
3,383
0.0% 0.00%
6.6% -14.29%
4.3% -33.33%
0.0% 0.00%
64.1% -3.53%
0
300
150
0
3,264
0.0%
5.3%
2.6%
0.0%
57.3%
Common stock - par
0.00%
600 13.4% 0.00%
Paid-in surplus
0.00%
100
2.2% 0.00%
Preferred stock
0.00%
0
0.0% 0.00%
Treasury and other equities 0.00%
0
0.0% 0.00%
Retained earnings
72.90%
804 17.9% 48.41%
Stockholder's equity
29.10% 1,504 33.6% 25.88%
Total Liab and Equity
30.80% 4,480 100.0% 17.77%
600
11.4% 0.00%
100
1.9% 0.00%
0
0.0% 0.00%
0
0.0% 0.00%
1,193
22.6% 45.54%
1,893
35.9% 28.70%
5,276 100.0% 8.04%
600
10.5%
100
1.8%
0
0.0%
0
0.0%
1,737
30.5%
2,437
42.7%
5,700 100.0%
Pro forma Projections:
Wades Office Furniture Liquidity and Leverage Ratios
Wades Office Furniture
Unaudited: , SIC #2522
FINANCIAL RATIOS
[- H I S T O R I C A L -]
[-- P R O F O R M A --]
[-- P R O F O R M A --]
2001
2002
$ 1,000
2003
$ 1,000
$ 1,000
Liquidity Ratios
Current Ratio
Quick Ratio
Days Cash
Accounts Receivable Turnover
Inventory Turnover
Days AP Outstanding
Days Cash to Cash Cycle
Est. W.C. financing Needs
Memo: COGS / Accounts payable
1.40
0.74
Days Times
2.11 172.64 x
55.67
6.56 x
78.00
4.68 x
53.09
6.88 x
82.70
4.41 x
$1,870
6.44 x
1.51
0.77
Days Times
2.94 124.30 x
50.00
7.30 x
74.49
4.90 x
53.00
6.89 x
74.43
4.90 x
$2,068
6.69 x
1.70
0.84
Days Times
2.45 149.16 x
46.00
7.93 x
71.57
5.10 x
53.00
6.89 x
67.02
5.45 x
$2,235
6.71 x
1.84 x
4.27 x
2.19 x
52.79%
0.00%
1.37 x
7.90 x
2.89 x
36.16%
0.00%
Leverage Ratios
Debt to Tangible Net Worth
2.05 x
Times Interest Earned
4.36 x
Fixed Charge Coverage
2.09 x
Net Fixed Assets to Tangible Net Worth46.97%
Dividend Payout
0.00%
Pro forma Projections: Wades Profitability, Cash Flow and Growth Ratios
Wades Office Furniture
[- H I S T O R I C A L -]
[-- P R O F O R M A --]
[-- P R O F O R M A --]
2001
2002
$ 1,000
2003
$ 1,000
Unaudited: , SIC #2522
FINANCIAL RATIOS
$ 1,000
Profitability Ratios
Return on Net Worth (ROE)
Profit Before Taxes to Net Worth
Return on Assets (ROA)
Profit Before Taxes to TA
Equity mult (leverage = TA / TE)
22.54%
36.24%
7.57%
11.76%
2.98 x
20.56%
33.00%
7.38%
11.53%
2.79 x
22.30%
35.58%
9.53%
14.90%
2.34 x
2.77 x
0.00%
2.83 x
0.00%
3.14 x
0.00%
Expenses
Net profit margin (NI / net sales)
2.73%
COGS / net sales
66.41%
Operating expenses / net sales
27.27%
Income Taxes to Earnings Before Taxes
35.67%
2.61%
68.00%
25.94%
36.00%
3.04%
68.00%
25.81%
36.00%
Sales / Net Fixed Assets
18.20 x
15.33 x
20.74 x
-1.71
-0.13
CFO / (DIV + last CMLTD & CM Term + bnk Notes)
-0.13
4.24
0.41
0.39
6.17
1.07
0.96
Income
Tot. asset turnover (sales / TA)
All other income / total assets
Cash Flow Ratios
CFO / (DIV + last CMLTD)
CFO / (DIV + last CMLTD + bnk notes)
Growth Rates
Sales Growth (annualized)
Cost of Goods Sold
Net Income
Total borrowed debt
Total Assets
51.88%
52.19%
123.03%
-20.00%
30.80%
20.00%
22.87%
14.82%
#N/A
17.77%
20.00%
20.00%
39.60%
-47.62%
8.04%
[--
Pro forma projections: Wades Cash Based Income Statement (operations)
Wades Office Furniture[- H I S T O R I C A L[---]P R O
CASH BASED INCOME STATEMENT
$ 1,000
F O R M A[----]P R O F O R M A --]
2002
2003
$ 1,000
$ 1,000
Net sales
Change in accounts receivable
Cash receipts from sales
12,430
(497)
11,933
14,916
(147)
14,769
17,899
(213)
17,687
Cost of goods sold
Change in inventory
Change in accounts payable
Cash purchases
(8,255)
(559)
374
(8,440)
(10,143)
(306)
235
(10,214)
(12,171)
(317)
296
(12,192)
3,493
4,555
5,495
(3,390)
73
35
90
0
(3,192)
(3,869)
110
(5)
20
0
(3,744)
(4,621)
110
(5)
20
0
(4,496)
Unaudited: , SIC #2522
Cash margin
Total operating expenses
Depreciation & amortization
Change in prepaid expenses
Change in accruals
Change in other current assets & liab.
Cash operating expenses
Cash operating profit
2001
301
811
999
Interest on marketable securities
Income on long term investments
All other expenses & income (net)
Cash before interest & taxes
0
0
(101)
200
0
0
(110)
701
0
0
(135)
864
Interest expense - Bank notes
Interest expense - Term notes and LTD
Income taxes reported
Change in income tax payable
Change in deferred income taxes
(157)
0
(188)
17
0
(101)
(85)
(219)
22
0
(52)
(71)
(306)
28
0
Cash flow from operations (CFO)
(128)
318
463
Wades Office Furniture[- H I S T O R I C A L[---]P R O
Pro forma Projections: Wades Cash Based Income Statement (investment, financing and cash)
Unaudited: , SIC #2522
CASH BASED INCOME STATEMENT
2001
$ 1,000
Cash flow from operations (CFO)
Capital exp. and leasehold improvements
Change in long-term investments
Change in intangible assets
Change in other noncurrent assets
Cash Used for Investments
Payment for last period's CM Term note
Payment for last period's CMLTD
Dividends paid (DIV)
Payments for financing
Cash before external financing
Change in short-term bank debt
Change in term notes & EOP CM term notes
Change in LT debt + EOP CMLTD
Change in stock & surplus
Change in preferred stock
Change in treasury and other equities
Change in other noncurrent liabilities
External financing
Extraordinary exp. and cha. In acct. prin.
Current period accounting adjustment
F O R M A[----]P R O F O R M A 2002
2003
$ 1,000
$ 1,000
(128)
318
(157)
0
(11)
0
(168)
(400)
0
0
0
(400)
0
(75)
0
(75)
0
(75)
0
(75)
(50)
(75)
0
(125)
(371)
(157)
338
310
0
0
0
0
0
0
310
(195)
400
0
0
0
0
0
205
(338)
0
0
0
0
0
0
(338)
0
0
0
0
463
0
0
0
0
0
0
0
Bank Management, 5th edition.
Timothy W. Koch and S. Scott MacDonald
Copyright © 2003 by South-Western, a division of Thomson Learning
EVALUATING
COMMERCIAL
LOAN REQUEST
Chapter 16