exhibit 3-1 strategic questions

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Module 3

Assessing the Risks Facing the Borrower


2

Visual 1-8

Loan Evaluation Process

Foundation Lending Concepts

Working Asset

Utilization

Risks Facing the Borrower

Financing

Role of the Bank

Evaluation of Management


Visual 1-8 Loan Evaluation Process, continued

Assessing Borrower Performance

Projecting Future Performance

Lending Decision

Structure

Support

Pricing

Monitoring

3


Visual 1-10

Key Variables

Level of Sales

Gross Margin

– Price

– Cost of Goods Sold

Sales, General, and Administrative Expense

Interest Expense

Taxes

Distributions / Dividends

4


Visual 1-10 Key Variables, continued

Accounts Receivable

Inventory

Fixed Assets

Accounts Payable

Financial Leverage / Debt Structure

Growth Rate

5


6

Visual 3-1

Economic Fluctuations

Seasonal

Cyclical

Secular

Wave


7

Visual 3-2*

Factors Influencing the Economy

Fiscal Policy

Monetary Policy

Regulation

Foreign Influence

Consumer Confidence

Structural Changes

Economic, Social and Governance (ESG)


Visual 3-3

Strategic Questions

Who Are We?

What Do We Want To Be?

Where Are We Going?

How Do We Get There?

What Do We Do?

Who is Responsible?

How Do We Monitor Our Progress?

How Do We Communicate The Results?

8


Visual 3-3 Strategic Questions, continued

Who Are We? Situation Analysis

What Do We Want To Be? Mission Statement

Where Are We Going? Goals

How Do We Get There? Strategies

What Do We Do? Action Items

Who is Responsible? Action Items

How Do We Monitor ImplementationOur Progress?

How Do We Communicate CommunicationThe Results?

9


Visual 3-3 Strategic Questions, continued

Who Are We? Situation Analysis

What Do We Want To Be? Mission Statement

Where Are We Going? Goals

How Do We Get There? Strategies

What Do We Do? Action Items

Who is Responsible? Action Items

How Do We Monitor ImplementationOur Progress?

How Do We Communicate CommunicationThe Results?

10


Visual 3-4

Competitive Questions

Who Is Our Customer?

Why Do They Do Business With Us?

What Makes Us Different?

11


Visual 3-5

Types of Competitive Strategies

Price/volume/cost leadership

Product differentiation

Product focus or niche

12


Visual 3-6

Factors Influencing

Level of Consumer Spending

Stock of liquid assets

Stock of durable goods on hand

Expectations income, prices, product

availability

Consumer indebtedness

Attitudes toward thrift

Taxation

13


Visual 3-7

Factors Influencing

Level of Capital Spending

Profit expectations

Technological advance and innovation

Acquisition, maintenance, and operating

costs

Interest rates (hurdle rates)

Government policies

Stock of capital goods (current operating

rate)

Expectations of future sales and profitability

14


Visual 3-8

Market Structure Summary

Pure Monopolistic

Characteristic Competition Competition Oligopoly Monopoly

Number of Very large Many Few One

competitors number

Ease of Very easy Relatively Difficult No entry

market entry easy

Product None Significant Standardized Unique

differentiation real or or product

perceived differentiated

differences

Control over None Function of Limited by Considerable

price ability to competition

differentiate

product

15


Visual 3-8 Market Structure Summary, continued

Nonprice None Significant Significant Limited

competition

Example Contractors Retail Trade Auto Utilities

16


Visual 3-9

Market Share Vs. Market Growth

17

Market ShareLarge

High

Low

Stars

Cash Cows Dogs

Question Marks

Mark

et

Gro

wth

Rate

Small


Visual 3-10

Life Cycle

18

Embryonic

Growth

Mature

Aging


Visual 3-11

Barriers to Entry

Economies of scale

Brand loyalty

Large capital investment

Access to channels of distribution

Proprietary technology

Favorable location

Financially strong, well entrenched competitors

High switching costs including out-of-pocket costs and impact on product quality

19


Visual 3-12

Profitability Measures

Return on Sales (ROS) = Profit/Sales

Return on Assets (ROA) = Profit/Assets

Return on Equity (ROE) = Profit/Equity

20


Visual 3-13

Profitability Measures

Interrelationship

ROS x Asset Utilization = ROA

Profit x Sales = Profit

Sales Assets Assets

.04 x 2 = .08

ROA x Financial Leverage = ROE

Profit x Assets = Profit

Assets Equity Equity

.08 x 2.5 = .20

21


Visual 3-14

Return on Assets Alternatives

Margin Asset Turnover ROA

1% 10x = 10%

2% 5x = 10%

5% 2x = 10%

22


Visual 3-15

Questions?

23

exhibit 3-1 strategic questions

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