The financials are the pivot on which the lending decision rests as it details the fundamental strengths and weaknesses of the company and its ability to repay the loans and advances given to it.

When Daruwalla or Mistry meet their bankers the banker will normally ask for their financials in order to determine whether it is indeed viable to lend to them. The banker will also seek to ascertain whether the financials prepared are audited. If it is so it would afford him more comfort. It is also imperative that upto date figures are given. No banker worth his saltwould arrive at a business decision based on old figures as many, many things could have happened in the interregnum.

What are the factors that the banker will look at in order to arrive at a decision?

The banker will attempt to make sure that the unit, based on its financials, is a going concern. This means that it is conducting its business normally and that it is not unviable or loss making.

Bankers will look at the capital base of a company. The larger the base the greater the company's ability to withstand and bear losses. Capital in this instance would also include reserves.

Another important issue bankers will look at is profit ploughback. Profit ploughback is to enable the company to expand, make it stronger and replace assets. If profits are not reinvested, the company will have to borrow in order to replace worn out assets or to purcahse new machines and this will erode its strength.

Bankers will always examine the quantum of borrowing - whether they are short term or long term, whetherthey are secured or unsecured. If the borrowings are large, in a boom year shareholders will benefit whereas in a bad year it would be the reverse. It is of prime importance to a banker whether the company can service its borrowing.

Fixed assets are important as in most cases fixed assets are employed to earn the income for the Company. The composition of fixed assets will be examined in detail and the nature of the fixed assets employed. There could be instances where there are hidden reserves such as land purchased sixty or seventy years ago which are still shown at cost. On the other hand, there may be obsolete assets or unproductive assets and no clear policy to upgrade assets.

Some companies have intangible assets on their Balance Sheets such as deferred revenue expenditure or preliminary expenses not written off. These are expenses and have no asset value and bankers will recast the Balance Sheet deducting these from the Company's net worth.

Many companies have investments. The banker will alwaysascertain the nature for these investments and the reasons for them. If it is not crucial for the business it would be better to liquidate and use the funds thus generated to reduce borrowings.

Bankers will invariably check current assets including stocks and debtors. He will examine how they have been valued and how old they are. This is in order to ascertain how real they are. Obsolete stocks and bad or doubtful debts should be written off or adequately provided for.

Sales turnover is another aspect that the Banker will examine. How have sales grown? How much are the sales? The volume indicates the Company's position in the industry and its sustainability.

A company's other income is also examined especially its composition and whether it would be recurring. Normally other income should be less than five per cent of turnover though there is no hard and fast rule. The Banker examines this to determine income streams and its dependability.

Expenses would normally be, when being examined, broken downto fixed costs and variable costs. Fixed costs would be those costs that would be incurred irrespective of any other factor. These will include rent, administration costs and the likes. Variable costs are those normally linked with the level of activity such as sales commission. The banker would check whether the growth in these costs are in tandem with the increase in income. If not the Company's profitability might be under threat.

Financing costs is a cost bankers will pay great heed to as the viability of the company could depend on it. The issue here is whether the Company can pay the interest on the facilities it enjoys from operating profits. If not there will be concern unless if the company can demonstrate that in the near term it would be able to.

The Banker would also look at the profits made before and after tax because the profits a company makes in the final deciding factor on the lending decision. No one will, in their right mind, lend more to a loss making company. On the other handbankers fall over backwards to lend to one that is making more and more profits every year.

Another aspect bankers will look at are the contingent liabilities of a company. Contingent liabilities are by definition a liability that may arise should an event occur such as a bill discounted being dishonored or a guarantee issued being called up.

However, sheer numbers by themselves are not adequate to make a decision. Bankers tend to reduce numbers to ratios in order to compaare strengths and weaknesses with other companies and between years. We will examine ratio analysis and the manner it should be computed in the next few articles.