1 The Cleaner Production Investment Process Day 1 For UNEP, Division of Technology, Industry, and...

1

The Cleaner ProductionInvestment Process

Day 1

For UNEP,Division of Technology,

Industry, and Economics

Gloucestershire Business School,

University of Gloucester, UK

ROSCAMStrategic Development

Consultancy, Zimbabwe

Prepared by:

FINANZAS AMBIENTALES,Lima, Perú

ARMSA,Guatemala

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Introduction

3

Course Background

[15 min]

4

Development of the training materials

Content has been developed by:– Gloucestershire Business School, UK– Finanzas Ambientales, Lima, Peru– The Illinois EPA– The Philippine Institute of CPAs– The Asian Institute of Management– UNEP Cleaner Production Financing National

Project Coordinators in Guatemala and Zimbabwe

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UNEP: Financing Cleaner Production — Support

United Nations Environment Programme (UNEP); Division of Technology, Industry, and Economics

Course support is from the project:“Strategies and Mechanisms for Promoting Cleaner Production Investments in Developing Countries”

Funding provided by the Government of Norway

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Words of Welcome

[15 min]

Introduction of Instructors

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Participant Introductions

[30 min]

8

Who is here today? What type of organization do you

work for?– e.g., industry, government, other– If from industry, which sector and what size

What are your job responsibilities and areas of expertise?– e.g., management, accounting, finance,

engineering, production, environmental

What is your investment perspective?– e.g., developer of investment proposals, one who

funds investment proposals

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Why are you here?

What work issues or concerns motivated you to come?

What are your learning goals for this course?

What are your expectations of this course?

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Course Overview

[15 min]

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Focus of the course

Sustainable banking??? Project financing

Also to incorporate your experiences, questions, and goals into the presentations, exercises, & discussions

In the context of Cleaner Production

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Cleaner Production is ...

“The continuous application of an integrated preventive environmental strategy applied to processes, products, and services to increase overall efficiency and reduce risks to humans and the environment.”

— UNEP

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Cleaner Production is different

Much of current environmental protection focuses on what to do with wastes and emissions after they have been created, otherwise known as “end-of-pipe” disposal & treatment

The goal of Cleaner Production is to avoid generating pollution in the first place

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Environmental management hierarchy

Environmental management hierarchy

Disposal

Control/Treatment

CLEANER PRODUCTION Pollution Prevention On-site recycling/reuse

BEST

LEASTDesirable

Off-site recycling/reuse

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Cleaner Production benefits

Reduces costs (of raw materials, energy, waste, emissions)

Reduces risk (to employees, human health, and environment)

Identifies new opportunities for more efficient operations

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CP4: Course aims (1)Entrepreneur’s perspective: Prepare a ‘bankable

proposal’ to justify economic feasibility

Manage the relationship with banks and other potential sources of finance

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CP4: Course aims (2)

Banker’s perspective: Raise awareness on Cleaner

Production investment proposals

Raise awareness on sustainable banking trends

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CP4: Course content (1)

CP: a successful strategy towards sustainable banking

Introduction to project funding Participants’ experiences with raising

funds - problems and issues The banker’s perspective - what banks

look for from firms seeking finance1- Economic viability of the project

2- Financial and economic position of the firm3- General economic background

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CP4: Course content (2)

Group exercise– Developing a bankable proposal– The banker’s response

Other potential sources of finance

Group exercise – Alternative sources of finance

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CP4: Course content (3)

Eco-criteria for investment decision-making

Post-funding implementation and control: after the application has been accepted

Group Exercise– Implementation and management

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Conclusion

Where to go for more information

Brief review of what we learned

Final questions and comments; Any other issues?

Course evaluation

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Time for a break! [20 min]

Time for a break! [20 min]

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CP: a successful strategy towards sustainable

banking

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Economy is a sub-system of ecology

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Towards a Sustainable Economy

Growth Eco-efficiency Sustainability

Yesterday Today Tomorrow

$

Mining

Oil&Gas

Industry

Trade-Serv

Agriculture

cleanpolluting

Flora & fauna

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The tools for the sustainable banker of the 21st century

Economic: IRR, NPV, Ratio-Analysis, balance sheets, cash flows, guarantees, etc….

Environmental: Cleaner Production,

Environmental Management Systems, Environmental Management Accounting,

Eco-labelling, environmental risks analysis and classification, Life-Cycle

Analysis, eco-balance, environmental reporting,etc….

Commercial

information,

public image,

etc

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A two-way bridge between two worlds

Financial world Environmental world

CP

Common language

Eco

-ri

sks

Eco

-di

vide

nds

businesses

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Current trends in commercial banking

Financial institutions are becoming increasingly similar Commercial banks’ activities are expanding in developing countries and countries with economies in transition Increasing interest in sustainable banking

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Types of financial institutions (FIs)

commercial banks savings and loan associations life insurance firms state and local government pension funds sales and consumer finance companies mutual funds insurance companies; credit unions

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Financial institutions - increasing similarity

Traditionally, different types of FI specialized narrowly in their own areas Still true to some extent, but less so Many FI’s are expanding their product-ranges into others’ areas

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Sustainable banking - (1)

banks and other FI’s are becoming more aware of their environmental responsibilities - both in banks’ own operations, and in lending

1992 Earth Summit: “UNEP Financial Initiative on the Environment and Sustainable Development”

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UNEP Finance Initiatives (UNEP FI)

Conceived at the 1992 Rio Earth Summit, UNEP FI has grown from from 6 banks to some 270 financial institutions by 2001.

– The UNEP FI is a voluntary pact between UNEP and some 270 financial institutions globally

– UNEP FI promotes sustainability excellence across the finance sector

– UNEP FI builds the business case for Financial Institutions and Insurers to become sustainability leaders

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Sustainable banking - (2)

Some banks are moving from a traditional defensive position:

- non-active - deny banks’ responsibilities for environmental impacts - resist environmental legislation

towards …..

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Sustainable Banking - (3)

…. Sustainable banking :

- Proactively seek environmental cost savings

- Recognize possible environmental effects on project’s and firm’s risks - Set up special environmental funds

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IMPACT ON FI

CP opportunitiesfor client

Business’ derivedenvironmentalliabilities and risks

Capital costs Operating

costs Market share

Reducedassets value

Potential legalliability

Damagedreputation

efficiency

costs

New marketopportunities

Betterreputation

Legal Liability

Financial

REPUTATION

Repayment Asset value New business

Fines Clean up

Opportunities for the clients and FI

Inherent preventiveapproach

Long term pollution liabilities

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Introduction to Project Funding

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The firm’s business environment - Relevant

factors Government policy Fiscal policy and legislation Financial sector Macro-economic developments Past and current practices in

project financing

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Options for project financing

Internal funds Private sector:

1. Commercial banks2. Development corporations3. Equipment vendors & subsidiary finance Companies4. Trade finance (suppliers and customers)5. Equity

Government sector

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Internal funds

Internal funds can be generated from:

– Capital introduced by the owner

– Profits & cash flows generated by the business and retained within it

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Capital from the private sector

Long-term loans to purchase fixed assets: secured or unsecured

Short-term loans (including lines of credits without conditions on use)

Leasing

Equity (issue of shares/stock) ...

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Capital from the government sector

Grants

Subsidies

Government-managed development funds

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Firms’ criteria in raising finance

Profitability Risk of excessive debt (‘Leverage’, or ‘gearing’) Matching duration of finance to

duration of project Procedures for application

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Participants’ Experiencesof Financing Projects

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Project finance - Issues and questions (1)

What was the project? Which sources were considered? Which sources were then

approached? What information did they require? Could you provide this information? What were their criteria? (Were

these clear to the firm?)

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Project finance - Issues and questions (2)

Was the application successful? If not - why not?

Did any problems arise during the process of applying?

What requirements did the financier set concerning post-funding project management?

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Project finance - Issues and questions (3)

What do you consider the firm did well? … and not-so-well?

Would you do anything differently another time?

What advice can you offer to others from this experience?

Does this experience prompt any questions?

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Some typical project finance issues and

problems ... The project is not considered to be

economically feasible (i.e. profitable) The firm is unable or unwilling to issue

more shares or to raise debt The firm does not yet have contacts

with commercial banks The firm is in public ownership and

private sources of finance are not accessible

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…and some possible solutions (1)

Problem: the project is not considered to be economically feasible

Solution: Total Cost Assessment of project

Problem: the firm is unable or unwilling to issue more shares or to raise debt

Solution: Leasing

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…and some possible solutions (2)

Problem: the firm does not yet have contacts with commercial banks

Solution: contact chamber of commerce, local accountants, NGOs funds managers, for assistance

Problem: the firm is in public ownership and private sources of finance are not accessible

Solution: contact local national CP centre for institutional assistance

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A few general points of advice...

consider the effect of the current business environment

search widely for possible alternative sources of finance

seek advice from experts and from contacts in other firms

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Time for lunch! [60 min]

Time for lunch! [60 min]

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The Bank’s Perspective

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Commercial banks: Purposes and profile (1)

Transfer funds from ultimate lenders to ultimate borrowers Acquire funds by receiving money from savers: savings accounts, deposit accounts, etc. Provide funds to borrowers through term loans, lines of credit, bonds, etc.

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Commercial banks: Purposes and profile (2)

Commercial banks aim to:– Maximize their returns– Minimize the risks they accept

Expertise in evaluating borrower credit-worthiness Competition between commercial banks helps to keep down lending rates

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Project finance from banks: the main options

Term loans:– Related to specific projects– Specific amount and term– Rate will reflect risk– Rate may be fixed over time or variable

Lines of credit:– Limited amounts– Flexible in use– Higher interest rates– Interest charged only on finance actually

used

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Loan application and approval procedure (1)

1. Research and review potential sources2. Initial informal discussions with bank loan officer3. Fill out bank’s loan application form; obtain all necessary data4. Submit to bank the loan application and supporting documents

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Loan application and approval procedure (2)

5. Review of application by bank6. Negotiate specific terms of loan7. Bank sends commitment letter8. Bank sends a “term sheet” which defines the specific lending terms9. Sign the loan agreement10. Receive the funds11. Proceed to implement project

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Bank will usually require...

Procedural completed loan application forms additional documentation as required, e.g. the firm’s accounts

Financial acceptable repayment plan proven economic viability (of both project and firm) collateral (i.e. security such as mortgage)

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Banks’ information needs

To assess loan applications, banks need information on :

1- Economic viability of the specific

project

2- The firm’s overall financial and

economic situation

3- The general economic and political background of the country and sector

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1- Economic viability of the specific

project

2- The firm’s overall financial and economic situation

3- The general economic and political background of the country and sector

Banks’ information needs

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Information on the project

Purpose of the loan Expected cash flows from project Expected profitability of project (NPV, IRR...) Assessment of risks of project How project relates to the firm’s business generally

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Purpose of the loan: to demonstrate:

cost reductions and increase in revenue?

sales and production levels increase?

reduced risks?

• Reduce energy use• Reduce material input costs• Reduce penalty fees

• Increase in sales and production and establish increase in demand• Improve product quality

• Environmental compliance and regulation costs

How will the CP Investment produce the perceived...

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Cash flow forecast/projection

• Look at the likely future cash position of the company.

• Examine the possible effects of changes in the cash flow components.

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Profitability analysis:Profitability indicators

A profitability indicator, or “financial indicator”, is: “a single number that is calculated for characterisation of project profitability in a concise, understandable form.”Common examples are:

• Simple payback period

• Return on investment (ROI)

• Net present value (NPV)

• Internal rate of return (IRR)

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Assessment of risks: Sensitivity analysis

– What could go wrong with the plans for the project?– What will be the effect on NPV if different assumptions are made re sales demand, costs, length of project life, etc.?

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1- Economic viability of the specific project

2- The firm’s overall financial and

economic situation

3- The general economic and political background of the country and sector

Banks’ information needs

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Concern about the financial facts of a business includes:

Organization's ability to meet current obligations

The nature of liabilities

The company’s ability to stand pressure

from both internal and external sources

The true worth of the various assets of the business (accurate picture)

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The bank’s information needs

To demonstrate a company’s credit-worthiness, bank will require: past financial statements (balance sheets, income statements, etc.) forecast future financial statements past credit history and references information on the firm’s management

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Business plan: Objectives

To show to outsiders to help to raise money

To use within the business– As a guide to future action– To control the firm by using the

business plan as a benchmark against which to compare performance

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Business plan: content past and forecast future financial statements brief overview of business markets, customers and competitors products and services distribution management sales forecasts how the firm is to be financed

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Information: what makes it useful

relevance reliability consistency completeness comparability timeliness understandability materiality feasibility and cost-effectiveness

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Interpretation of financial statements

RATIO ANALYSIS

•Is useful to virtually all readers of financial accounting statements.

•Ratios are like a thermometer which takes the actual temperature of a business in relation to some standard measure.

Ratio analysis can help to identify problem areas but in itself cannot offer solutions: these must be provided by the businessman.

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For financial analysis purposes, it is useful to classify ratios under five headings:

Profitability ratios which measure the overall effectiveness of managers as shown by the returns generated on sales and investments.

Liquidity ratios which judge whether a business is likely to run out of cash in the short term.

Ratio analysis

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• Solvency ratios which measure the extent to which a business is financed by borrowed money and the risk involved.

•Activity ratios which measure how effectively the business is using its resources.

•Growth ratios which measures the business’s past rate of growth and assess the potential for future growth.

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Profitability ratios key question: at what rate does the business generate profit from its activities?

Test 1: What is the proportion of direct trading profit contributed by every dollar worth of sales?

Test 2: What is the amount of profit generated out of every dollar invested in the company?

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Profitability ratios:Examples

Test 1: Gross profit percentage on sales :

=

Test 2: Return on capital employed :

= Profit before interest & taxCapital employed

Gross profitGross sales

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Liquidity ratios definition: ability to meet short- term operating liabilities

key question: how much is the total of the firm’s short-term liabilities?

Test 1: are the liquid (short-term) assets sufficient to cover adequately these short-term liabilities?

Test 2: are the regular operating cash inflows adequate to cover short-term

liabilities, as they fall due for payment?

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Liquidity ratios:Examples

Test 1: Current ratio :

=

Test 2: Acid test quick ratio :

=

Current assets Current liabilities

Current assets - stockCurrent liabilities

The acceptable ratios depend upon the type of industry in which a company operates.

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Solvency ratios definition: ability to meet long-term liabilities such as debt

key question: how much is the total of the firm’s indebtedness?

Test 1: what are the relative proportions of (1) equity, and (2) debt?

[“gearing”, or “leverage”]

Test 2: are operating profits adequate

to cover the interest that has to be paid regularly on the debt?

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Solvency ratios:Examples

Test 1: Debt ratio :

=

Test 2: Times interest earned :

=Interest charges

Earnings before interest & taxes

Total debtTotal assets

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Activity ratios

Key question: How effectively does the firm use its resources?

Test 1: What is the turnover of stocks?

Test 2: What is the quality of debtors and credit policies of the business? How many day’s sales represented by debtors?

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Activity ratios:Examples

Test 1: Stock turnover ratio :

=

Test 2: Debtors turnover ratio :

=

Sales revenueStocks (at period end)

Debtors (Balance sheet)Average daily sales

Average daily sales =

Sales as per income statementDays (365)

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Limitation of ratios

(A) differences found among the accounting methods used by various companies, which make comparisons difficult even when talking about the same industry

(B) financial statements are based upon past performance and past events, we must project our evaluation from this basis

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• Though with limitations, ratios still provide guides and clues in spotting trends towards better or poor performance and in finding significant deviations from average or an acceptable standard, if any is available.

• It is in the interpretation of such trends and deviations that the analyst will use his skills and experience to determine what is likely to happen in the organization.

Conclusion

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1- Economic viability of the specific project

2- The firm’s overall financial and

economic situation

3- The general economic and political background of the country and sector

Banks’ information needs

86

General economic background

National and world economy: - forecasts of economic growth - forecasts of inflation - political or economic instability

Sector-specific background: - developing new technologies - changes in product markets - new legislation and regulation - level of competition in the sector

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Conclusions (1)

Banks have specific demands for information due to their loan application/approval procedures Most information should be provided by applicants Banks will maintain some data themselves (e.g. general economic data)

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Conclusions (2) banks obtain information on firms through:

– the application forms and supporting documents submitted by the firms– face-to-face contacts and visits to the firm– the history of the bank’s relationship with the customer

post-funding control enhances the relationship and facilitates future borrowing

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Conclusions (3)

Firms should set up and maintain adequate information systems:

Before

They are needed !

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Group exercise - Acme: Part 1

Preparing a ‘Bankable’ Proposal Read the Acme case, it is detailed in

your handout You will be working in a small group

with others The task is to develop a proposal to

a bank for finance for acme’s project

Your group will present this to the banker

Plan ahead - what points to include?

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Time for a break! [15 min]

Time for a break! [15 min]

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Developing a Bankable Proposal:Acme Electroplaters

Part 1

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Group exercise - Acme: Part 1

The task1. Prepare presentation to a bank making the case for finance for Acme’s project

2. Complete the standard application bank loan application form, located in your handout

3. Anticipate possible questions from the banker

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firm’s current financial position

history of firm

the project’s expected returns and risks

availability of relevant information

firm’s ability to implement the project

Group exercise - Acme: Part 1

Criteria for success

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Checklist:

“Funding Application Format Checklist”

Checklist:

“Funding Application Format Checklist”

Refers to the checklist document

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Review of what we have covered today

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Final questions or comments?

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The Cleaner ProductionInvestment Process

Day 2

For UNEP,Division of Technology,

Industry, and Economics

Gloucestershire Business School,

University of Gloucester, UK

ROSCAMStrategic Development

Consultancy, Zimbabwe

Prepared by:

FINANZAS AMBIENTALES,Lima, Perú

ARMSA,Guatemala

99

Any questions?

Arising from day 1 ?

Looking ahead to day 2 ?

100

Developing a bankable proposal:

Group presentations

101

Time for a break! [15 min]

Time for a break! [15 min]

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Developing a bankable proposal:

the banker’s response

103

Time for lunch! [60 min]

Time for lunch! [60 min]

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Other Potential Sources for Project Financing

105

Checklist:

“Funding Options”

Checklist:

“Funding Options”

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Further potential sources Internal funds

Equity (owners’ capital) Leasing / equipment vendors and

subsidiary finance companies Trade credit (suppliers, customers)

Micro-credits

Development bank loans

Government finance

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Internal funds (1)

Internal funds = retained profits (‘reserves’)

Size of reserves depends on:-– Past profitability of business– Minimizing tax liabilities– Proportion of profits retained

vs. Paid out to owners in dividends

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avoids having to approach external sources (and transaction costs)

preserve borrowing power for future projects

have an indirect opportunity cost not available to new firms must be built up over time

Internal funds (2)

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Equity capital

Equity = ordinary shares, i.e. owners’ capital

Potential sources of new equity:-– more capital from the current owners

(shareholders)– new shareholders, by private

approaches– venture capital– a public share offering

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Equipment vendors and subsidiary finance

companies Leasing has become a major source of

financing that is provided by some equipment vendors and subsidiary finance companies (‘lease-providers’).

With ‘financial leases’ (or ‘capital leases’):– Title to the equipment is held by the firm which

operates it (the ‘lease-holder’)– The lease-provider retains a first security

interest in the equipment– The lease-holder faces the risks and receives

the rewards of ownership

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Trade finance potential sources

– suppliers of raw materials– suppliers of other goods and services– key customers

their motive: to secure a key customer or source of supply

risk: being tied to a particular supplier or customer and unable to develop business freely

112

Micro-Credits (MC) aim: ‘to match appropriate technologies and financing, through the development of packages that build on community values’ local initiatives, depending on MC managers’ knowledge of their own localities and markets an expanding source for socially desirable projects - but little-known

113

Grameen Bank (1) Grameen Bank,Bangladesh: the

pioneer (founder: Mohammed Yunus)

core belief: the credit-worthiness of the poorest members of a community

aim: to break out of the poverty cycle, using innovative technologies

a model for many similar banks operating across the world

Micro Credit example

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finance derived from international sources (e.g. development banks) Grameen uses this to make ‘soft’ loans to local borrowers several projects in renewable energy and other environmental investments website: www.Grameen-info.org

Grameen Bank (2)Micro Credit example

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Grameen’s lending policy no requirement for security repayable in weekly instalments eligibility for subsequent loans depends on full repayment of any earlier loans transparency in bank transactions helps to encourage repayments by borrowers, through social pressure

Micro Credit example

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Grameen - the results

2.34 million borrowers in Bangladesh

94% are women loans for projects in 39,000 of

86,000 villages in Bangladesh 1977-1997, total lending - US$2

billion now, 223 Grameen-type

programmes in 58 countries

Micro Credit example

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Development banks (1)

examples:– World Bank– International Finance Corporation– Inter-American Development Bank– Asian Development Bank

wide and diverse range of programmes and projects

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Development banks (2)development banks aim:

– to lend large amounts…– … but at lower transaction costs

therefore, traditionally, mainly large projects in the public sector stringent guidelines on project characteristics and lending criteria (e.g. to be environmental, social,

developmental, technically innovative)

119

Development banks (3)

Benefits of development bank finance:

can help with technological and managerial advice on the project

project packaging

liaison with other potential sources of finance

120

Raising finance from government schemes

identify the available schemes find out:

– the criteria and conditions of the scheme– the procedures for application

develop the firm’s application:– to match the scheme’s criteria – to identify how the project supports public policy objectives

121

Grants low or zero cost of capital may be available for only part of a

project, or on restrictive terms preserves borrowing power for other

purposes accessible via local brokers and/or

international development agencies BUT:

– can conceal true long-term costs– misses opportunity to build long-term

relationship with financiers

122

Past funding experience successful past experiences with

financing projects?

how might CP projects be different? Why might they be ...

– more difficult to finance?– easier to finance?

could these further sources be relevant? If so - when and how?

123

Summary a wide range of potential sources means:

– more likely to be able to raise finance...– … and on better terms

the range varies between countries

and over time an early search for a wide range of sources can be very worthwhile each source will have its own criteria and procedures

124

Acme Electroplaters:Part 2

125

Time for a break! [15 min]

Time for a break! [15 min]

126

Eco-criteria for investment decision-

making

127

Criteria (+): activities to encourage

Bio-pesticides Bio-control

Bio-fertilisers Renewable energies

Efficient energy Clean fuel

Aquaculture Organic agriculture

Health & safety Environmental

management

Pollution control Pollution prevention

Recycling Waste management

Reforestation Eco-tourism

Eco-data access Corporate eco-

donations

Eco-education Nomad forest products

128

Sectors of major concern:

Energy and Mines Petroleum and Chemicals Agribusiness Transportation Recycling Eco-Tourism

Where CP can highly contribute to reduce risk and increase efficiency and profitability

129

Energy

Risks– Atmospheric emissions– Water contamination– Acoustic pollution– Safety

Opportunities– Alternative energies– Cost reduction

130

Mining

Risks– Environmental: air and water

pollution– Occupational: health and safety

Opportunities– Genuine wealth creation– Production of quality durable goods

131

Agribusiness

Risks– Solid waste – Water and ground contamination– Public health

Opportunities– Organic Brands and distribution

channels– Exportation opportunities through

international standards

132

Banks’ requirements to obtain services in

Environmental risk assessment of business activities

Environmental footprint of investments, guaranties, leasing

Training for local bank staff

Development of new eco-products (capital risk investment fund, forest funds)

Identification of new business opportunities within client database

133

Competitive banking

“In today's hyper-competitive financial services environment, incremental improvement is no longer enough.

To be successful, firms need to undertake massive change - a fundamental reinvention of their strategies and operations that will allow them to delight customers, exceed investor expectations, and attract and retain the best and the brightest professionals.”

Reinventing FINANCIAL SERVICES

Succeeding With Corporate Transformation

Deloitte Consulting and Deloitte & Touche

2001

134

Sustainable banking: trends

Avoid eco-risks, identify eco-business opportunities;

Internalise environmental costs & debts in company’s decision-making;

Total environmental accounting;

Capital markets increasingly value “green” capital;

Use of eco-criteria in decision-making;

New financial eco-products (eco-funds, eco-mortgage, renewable energy credits);

CP: prevention is better than end-of-pipe solutions

Efficient use of resources (water, energy);

Fewer, bigger banks.

135

Dow Jones Sustainability World Index

Dow Jones Sustainability World Index

Dow Jones Global Index (USD, Price Index)

330.00

280.00

230.00

180.00

130.00

80.00

12/93 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97 6/98 12/98 6/99 12/99 6/00 12/00 6/01

136

Financial eco-innovations

Personal banking Corporate banking

Eco-mortgage Eco-shares

Eco-autos Eco-financial derivatives

Home-office: 2x1 ESCO, Energy Service Co

Eco-savings Build, Operate, Transfer

Eco-leasing Eco-loans

Swap for debt Eco-credit cards

Eco-investment funds

137

Post-funding management and control

138

Aims ensure repayments are made in

full and on time avoid foreclosure / calling in

security comply with all loan contract

conditions build strong credit history and

relationship for the future

139

Post-funding management and control: issues

1-implementation phase2-security for loans (collateral)3-other loan contract conditions4-regular financial information5-evidence of strong internal

management 6-keeping the lender informed

140

1-Implementation

need to synchronize:– receiving the finance– acquiring the new asset(s)– starting the new business activities

project management techniques and skills, e.g. ‘critical path’ analysis

clear organizational responsibilities

141

2-Security for loans usually requested by banks,

though less crucial than the firm’s ability to repay

can include owner’s personal assets as well as the firm’s assets

need to protect assets used as security

Third-party guarantee

142

3-Loan contract conditions (‘covenants’)

Examples: - adequate liquidity - adequate solvency (gearing / leverage) - no significant changes in:

- nature of business - ownership

- no sales of major assets without the prior agreement of the lender

143

4-Regular financial information Financial Reports

(FR’s): rules based on legal rules and

accounting standards (‘Generally Accepted Accounting

Practice’) required annually by law lenders may require more

frequently– and promptly– with supporting analyses

144

Analyzing FR’s

FR’s can be analysed by readers to evaluate the firm’s likely return and risk position, as reflected in:

liquidity solvency profitability operating efficiency

145

Analyzing FRs: comparators

over time– ‘vertical’, or ‘trend’, analysis

against other (comparable) firms– ‘horizontal analysis’, or

‘benchmarking‘

against other standards

146

Preparing FR’s: guidelines for management

disclose accounting policies, especially if different from normal

be open where estimates and approximations have been necessary

indicate if any amounts in the FR’s are no longer realistic

ensure reliability of the accounting systems which collect the data

thoroughly review FR’s before sending outside the firm

147

5-Evidence of good internal management

performance indicators

budgeting

costing and cost control

ex-post audit of projects

148

6-Keeping the lender informed

Keep lenders informed about any significant changes in:

trading the firm’s risk factors key personnel nature of the business any other factors relevant to risk and

return

149

Post-funding experiences

any experience during this phase?

what terms did lenders impose?

were any difficulties met, in complying with these terms?

how did the firm deal with them?

150

Acme Electroplaters:Part 3

151

Conclusion

152

Review ofwhat we have covered

in this course

153

The CP investment process (1)

introduction to the course CP: a successful strategy towards

sustainable banking introduction to project funding and

participants’ experiences banker’s perspective and

information needs

154

The CP investment process (2)

developing a bankable proposal other potential sources of finance eco-criteria for investment decision

making post-funding management and

control conclusion

155

Final questions and comments?

156

Course evaluation

157

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