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1f69e Warning Signs

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1f69e Warning Signs

  1. 1. Amity Business School MBA Class of 2010, Semester IV Strategic Financial Management Prof Akhil Swami/Anuj Srivastava
  2. 2. Warning signs that banks should look for
  3. 3. Management related <ul><li>Lacks technical expertise. </li></ul><ul><li>Failure to control costs. </li></ul><ul><li>Poor capacity utilization. </li></ul><ul><li>Improper inventory and receivables management. </li></ul><ul><li>Inability to anticipate problems and take remedial measures. </li></ul><ul><li>Failure to anticipate competition and losing competitors edge. </li></ul><ul><li>Diversion /siphoning of funds. </li></ul><ul><li>Fraudulent or speculative transaction. </li></ul><ul><li>Conflicts among promoters/directors/managers. </li></ul><ul><li>Improper delegation. </li></ul><ul><li>Owners not giving enough time to the financed unit. </li></ul><ul><li>Salaries show sharp reduction. </li></ul><ul><li>Budget/interim information not made available by management. </li></ul><ul><li>Promoters unaware of co present/ future direction. </li></ul><ul><li>Frequent changes in the senior management. </li></ul><ul><li>Board constitution and involvement. </li></ul><ul><li>Resignation of key personnel. </li></ul><ul><li>Non compliance with covenants. </li></ul><ul><li>Deterioration in the appearance in the premises </li></ul>
  4. 4. Technology related <ul><li>Adopting processes that have not been tested on commercial stage. </li></ul><ul><li>Choice of obsolete technology. </li></ul><ul><li>Wrong choice of technology or collaboration. Not suitable to adopters local conditions. </li></ul><ul><li>Unsuitable non optimal location </li></ul><ul><li>Uneconomic size. </li></ul><ul><li>Faulty or unsuitable equipment. </li></ul><ul><li>Improper balancing of equipments. </li></ul><ul><li>High production wastages. </li></ul><ul><li>Failure to take care of environmental factors and pollution control measures. </li></ul><ul><li>Inadequate quality control procedures. </li></ul><ul><li>Improper choice of product mix. </li></ul><ul><li>Factory operating well below capacity. </li></ul><ul><li>Adoption of obsolete production methods. </li></ul>
  5. 5. Product Related <ul><li>Overestimation of Demand. </li></ul><ul><li>Orders slowing down. </li></ul><ul><li>The borrowers changes suppliers frequently. </li></ul><ul><li>Inventory to one customer increases. </li></ul><ul><li>Concentration shifts from known to one of lesser stature. </li></ul><ul><li>Firm loses important supplier or customer. </li></ul><ul><li>Demand for product falls. </li></ul><ul><li>Obsolete product distribution methods still adopted. </li></ul><ul><li>The co still supplies to troubled customers and industries. </li></ul><ul><li>Product pricing improper. </li></ul><ul><li>Increased sales discount. </li></ul><ul><li>Large orders booked at fixed price even in inflationary times. </li></ul><ul><li>Ineffective marketing setup. </li></ul><ul><li>Unscrupulous sales and purchase practices. </li></ul><ul><li>Improper launch of new products. </li></ul>
  6. 6. Financial management related <ul><li>Underestimating project cost at the time of appraisal. </li></ul><ul><li>Inadequate working capital; by faulty estimation or diversion. </li></ul><ul><li>Improper costing method for product pricing. </li></ul><ul><li>Financial risk due to high leverage. </li></ul><ul><li>A liberal dividend policy. </li></ul><ul><li>Diversion of bank funds. </li></ul><ul><li>Differing payment of payables and creditors. </li></ul><ul><li>Unusual items appearing in the balance sheet. </li></ul><ul><li>Negative trends in important indicators like sales, gross and net profit. </li></ul><ul><li>Slow down in collection of account receivables and increase in age of debtors. </li></ul><ul><li>Inter co payables and receivables not explained properly. </li></ul><ul><li>Undue reduction in cash balances, overdrawn cash balances, and uncollected cash normally liquid periods. </li></ul>
  7. 7. Contd. <ul><li>Inability to take trade discounts, </li></ul><ul><li>Deferred payment of statuary liabilities. </li></ul><ul><li>Creditors not paid at the end of the wc cycle. </li></ul><ul><li>Interim results either not provided or provided incomplete. </li></ul><ul><li>Late release of financial statements to banks/FI. </li></ul><ul><li>Suppliers cut back favorable terms. Accumulation of unexplained debtors and creditors. </li></ul><ul><li>Large and frequent loans to and back from managers and affiliates. </li></ul><ul><li>Rotates or restructures bank debts. </li></ul><ul><li>Large customers creditworthiness not ascertained. </li></ul><ul><li>Expanded without WC. </li></ul><ul><li>Financial controls are weak. </li></ul><ul><li>Sale of profitable business or product line. </li></ul><ul><li>Approaches bak frquenly for adhoc increase in limits. </li></ul>
  8. 8. Exogenous to the Firm <ul><li>Currency Risk----If it depends heavily on imported equipments. </li></ul><ul><li>Upward revision on import duties. </li></ul><ul><li>Delay in approval from Govt/Statuary bodies. </li></ul><ul><li>Delay in sanction of loans. </li></ul><ul><li>Non availability of RM. </li></ul><ul><li>Power Cuts. </li></ul><ul><li>Transport bottlenecks. </li></ul><ul><li>Delay in supply of critical equipments. </li></ul><ul><li>Act of God. </li></ul><ul><li>Delay in Commissioning Down stream projects . </li></ul><ul><li>Withdrawal or reduction or reduction in the degree of protection by Govt, </li></ul><ul><li>Entry barrier low . </li></ul><ul><li>Availability of cheaper substitutes in the market. </li></ul><ul><li>Economic slow down. </li></ul><ul><li>Funding not adequate </li></ul>

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