CREDIT RISK MANAGEMENT

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Financial Analysis: Balance Sheet

Current Assets
Current assets are short term in nature. Their value changes due to the increase/decrease in activity within the company. They reflect the immediate liquidity within the company. Current Assets include 1. Inventories - It refer to the stocks of raw materials (RM), finished goods (FG), spares and work in progress (WIP) within the company. Inventory is an important section to analyze, as any build up in inventory reflects either: The inability of the company to sell, or Inefficiency in the planning process. Reclassification of Inventory Raw materials - These are inputs to the production process, to which you add value and sell as finished goods. Stock in-progress - It refers to the goods that are currently under production and have been taken out of stores (storage), but have not been included in finished goods. Finished goods - These are the inventory of goods that are ready to sell. They may be at the plant or at a warehouse. Consumable spares - It refers to any other inputs that are used in the production process which are not raw materials, but yet get consumed.

This break-up is needed to calculate the amount of time taken to convert raw materials into finished goods (holding days for raw materials). 2. Trade Debtors - Trade debtors are those debtors who owe money to the company, due from the sale of finished goods produced by the latter Trade debtors are classified into: Debtors less than six months Debtors over six months If the debtors over six months have increased as a percentage of debtors less than six months, then its a cause of concern for any company. The debtors over six months have a higher likelihood of turning bad or irrecoverable. 3. Other Current Assets It includes: Cash and bank balance Prepaid expenses Loans and advances Advance tax is tax paid to the tax authorities in advance Others (Deposits with sales tax etc.)

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4. Fixed Assets Let us now take a look at the Fixed Asset profile. Land & Building It refers to the assets held by the company in the form of any land or building. It does not include value of the plant. Plant & Machinery It refers to the book value of the entire plant including all machinery within. Sundries It could be any investment in fixed assets that is other than the Land & Building and Plant & Machinery. Depreciation to date As all assets are recorded at book value or value at the time of purchase. Therefore, the depreciation has to be entered for the entire period upto the current year to get the net value of assets. Capital Work in Progress It refers to any WIP in respect of plant or capital equipment. This often shows the progress of any expansion plans. 5. Non Current Assets Non-current assets are assets that have a tenor longer than 1 year, but which cannot be classified into the fixed assets category. These include loans and advances greater than a year, deposits which are long term in nature, etc. 6. Deferred Tax Asset This refers to taxes paid in advance, that can be set-off with tax liability in the later years. The tax expenses is incurred in this financial year but is utilized to set off taxes from future years. 7. Intangible Assets/Miscellaneous Expenditure Intangible assets are assets that do not exist in physical form. Patents, copyright, goodwill are examples of such assets. Miscellaneous expenditure is, expenses incurred at the time of a public issue or any other equity issue. These are capitalized over a long period of time as they do not pertain to any particular year.

Short Term Loans

There are three primary ways the company can borrow in the short term. Working capital loans - include CC and WCDL Short term loans - taken for cash flow mismatches Commercial Papers

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Current Liabilities
Current Liabilities are liabilities that need to be repaid immediately, or within a year. Current liabilities could be classified as: Creditors for Purchases - These are the creditors for purchase of raw materials. Other Current Liabilities Creditors for Expenses - These creditors are owed money by the company for reasons other than purchase of raw materials.
Provision for Tax - Provision for any taxes is considered as a current liability. Companies often do not know

the exact amount they need to pay for current year taxes. Long Term Debt due within one year - This is also known as Current Portion of Long Term Debt. This refers to the principal amount of long term debt that has to be repaid by the company in the current financial year.
Outstanding Expenses - Any outstanding expenses are considered current liability, regardless of the purpose

of the expense. Others (Current Liabilities / Provisions) - Any other provisions or liabilities that are regarded as current by the credit manager would be included in this field. Creditors on Capital Account - These are creditors for purchase of machinery or any capital equipment that the company purchases.

Long Term Liabilities

In simple terms, long-term liabilities are liabilities which are due for repayment, after one year. Term Loan from institutions/Banks - This refers to any loans taken from banks/FIs that are long term and not due in the next year. Preference Shares due for Redemption - A company generally issues this type of shares on the clause that, the company will repay the amount of share capital to the holders of this category of shares, after a fixed period or even earlier, at the discretion of the company.
Fixed Deposits - These refer to any fixed deposits that the company issues to the public. These are usually long term in nature unless they are due for redemption in the current financial year.

Foreign Currency Loans - Those raised through pre shipment/post shipment finance or ECBs are included in this field. Debentures - Convertible or otherwise- are entered into this field. Long Term Liability to be taken as Quasi Equity - Any loan/ICD given to the company by a parent company or associate company, is regarded as a quasi liability, as it is long term in nature but not equity.

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Capital and Surplus

1. Paid-up Capital - The amount of equity that has been invested by owners of the company. 2. Preference Share Capital - Any preference capital that is not redeemable in the next financial year. 3. Reserves and Surplus - Accumulated in the company over time. This gets accumulated through share premium received, undistributed profits, and other general reserves. 4. Revaluation Reserves - Any surplus amount that has been included in the balance sheet through revaluation of assets. 5. Loss Brought Forward - Any cumulative losses that are brought forward from previous years. 6. Minority Interest It refers to the companys investment in the assets of a subsidiary company. This is shown separately in the balance sheet of the company, but has to be included under the head of equity. 7. Deferred Tax Liability - Deferred tax liability refers to any tax liabilities that have to be borne by the company pertaining from the previous years due to deferment. In this case, the tax expense has incurred this year but pertains to profits of a previous year.

Balance Sheet Format Liabilities Assets Total Current Liabilities (a) Total Fixed Assets (e) Long Term liability to be taken as quasi equity Total Current Assets (f) (i)* Total Long Term Liabilities (b) Other Non Current Assets (g) Capital & Reserves (c) Deferred Tax Asset (h) Deferred Tax Liability (d) Intangible Asserts/Miscellaneous Expenditure (i) Total Liabilities (a+b+c+d) Total Assets (e+f+g+h+i)

*Will come under capital & reserves

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