What Criteria for Getting Grant - Article Example

What Criteria for Get Grant 1. As a lending agency, what criteria would you use to determine how much to grant, to whom, and under what conditions? More and more time is spent by credit officers and credit analysts on collecting, reviewing and analyzing their customers' financial statements. The most commonly used tools for analyzing customers include financial ratios, customizable ratios, peer-group comparisons and custom reports. The number of different ratios that a credit analyst should take into account when analyzing the company is enormous, however, there are a few ratios that can provide a good insight into company’s liquidity, profitability... 1.Debt Ratio A ratio that indicates what proportion of debt a company has relative to its assets. It is calculated by dividing total debts by total assets. A debt ratio of greater than 1 indicates that a company has more debt than assets - a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk. 2.Loan to Value Ratio A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance. 3.Gross Debt Service Ratio – GDS A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment about whether a potential borrower is already in too much debt. Receiving a ratio of less than 30% means that the potential borrower has an acceptable level of debt. 4.Gearing Ratio A general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. The higher a company's degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry. The best known examples of gearing ratios include the debt-to-equity ratio (total debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and debt ratio (total debt / total assets). 5.Solvency Ratio One of many ratios used to measure a company's ability to meet long-term obligations. The solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. Thus, credit quality can best be evaluated by analyzing the probability of a company running out of both cash and profits at any given moment. To evaluate the possibility of a company running out of cash, lenders generally look at a cash budget for the firm. They evaluate various scenarios and try to determine how likely the ending cash balance will be negative, implying a need for outside funds that may not be forthcoming if the company is not profitable. The extent of the credit losses that then arise if a firm does run out of cash is a function of the collateral or seniority status of each debt, as well as the value of the total assets of the company in bankruptcy. Essentially, credit analysis can be simply conducted by comparing the company’s average Times Interest Earned (TIE) ratio over the past few years to that of the cross-sectional average TIE of groups of firms with the same public credit rating, such as the same Moody’s or S&P letter rating for which public data are available. Then set the company’s starting credit rating equal to that which most closely matches the TIE of the firms with a given letter credit rating. Next, the trend in the TIEs is examined to determine if more weight should be placed on the most recent year in determining the credit rating. A rising trend indicates the credit rating based on the past average should be adjusted upward, while it should be adjusted downward for a declining trend. The final step involves the cash budget. Here, pretax income before nonrecurring items is added to depreciation expense and liquid assets (including 100 percent of securities, 90 percent of receivables normally and all open unused lines of credit), while non accrual current liabilities are subtracted from this total. The resulting ending cash balance can be divided by revenue, cost of revenues and the difference between the two, and these ratios can be evaluated as to how likely a decline in price, a rise in costs and a drop in unit sales are, respectively. Once credit rating has been completed, the credit rating can be cross-referenced with the recent past average default rate of companies with that rating. Then it is merely a matter of estimating the past payoff in default to determine the total default losses expected from the debt. The payoff in default can either be estimated based on the average payoff for debts of similar collateral or seniority status, or it can be examined in more detail utilizing the procedures. Once an expected value of default losses is computed, it is possible again to cross-reference with the average past default losses of bonds of different credit ratings to get a final rating. The systematic risk, and therefore the yield spread, should be a function of this variable. Of course, embedded options like prepayment features must also be incorporated into the yield spreads, but those options can be evaluated quite easily with software incorporating complex mathematics, as explained in my earlier columns. While such software makes extremely complicated financial mathematics simple to apply, and while this article illustrates how the complexity of evaluating credit risk can be simplified somewhat, credit analysis still requires the abilities of a human credit analyst. 2. Discuss the growth stages of an organization from infancy, adolesence and maturity in relationship to its capital acquisition highlighting the challenges of financial management. Some organizations are begun by a single, visionary founder who leads the way and assembles around him or herself a group of less energetic persons who are willing to legitimize and support the founder. In the case of a strong leader and a“following board,” the brunt of the organization’s initial work typically falls on the leader, and assistants whom he or she has recruited. In the case of a leading board, board members and other volunteers usually pitch in, with enthusiasm and without much formal structure. In either case, the group may contract shortterm staffers for projects, when funding is available. When the money runs out, the organization returns to its volunteer mode. The board now assumes a very large challenge— to learn to work with and to support its newly-formed staff. The day that it signs its first long-term contract, it must assure a steady enough source of revenue to pay the salary. At the same time, it must now delegate authority to the new staffer, and also share power with that person as a new leader. The financial responsibility usually causes board members most anxiety, but it’s often the new working relationship that proves more difficult. After several years in existence, organizations usually reach a certain maturity. They may have one or more successful programs run by the staff, which cover the salaries and achieve some of the goals for which the organization was created. The board is shifting its focus to fundraising, oversight, and setting policies and goals. The executive director administers the staff and programs and exerts increasing influence on the organization’s general direction. The executive director and the board president emerge as the organization’s “leadership team”—hence the term, “shared governance.” Organizations which began from single funding sources begin to diversify their funding base. Most prefer to segregate fundraising from their programs, a sure kiss of death for the fundraising. But, sustainable organizations diversify and integrate fundraising into their work in a way that the staff and volunteers can accept and support. Organizations usually arrive at the “governing” stage with growing programs. The board typically views expansion as a sign of success, though some board members may begin to worry about the consequences of growth. The expansion of the program, or of program opportunities often triggers a decision to begin strategic planning. Relatively few organizations pass into the “Maturity” phase, more commonly associated with long-established organizations The executive director’s time is typically dedicated to administration, fundraising, and the duties of representing the organization. The diversity of programs requires more specialists. Individual projects are frequently assigned to different departments, which often function like microcosms of the whole institution, and may compete among one another for resources. Having successfully integrated fundraising into its operations, staff becomes comfortable with fundraising, and some staffers specialize in it. As the program grows, the organization can address its programmatic goals on multiple fronts, and benefits from the synergy of coordinated efforts. The organization achieves real influence. On the other hand, as the program diversifies, it often becomes more difficult to perceive its central thrust, or to measure its cumulative impact. Once organizations have reached a certain maturity, it’s much less easy to predict what sorts of transitions lie ahead. The only certainty is that something will change, however. And organizations which have embraced the challenges during their growth will be better prepared for the new, inevitable, challenges which await. The capital structure can maximize the value of the company as well as destroy it, if chosen wrong, so close attention should be paid to cost of financing. Usually equity financing makes companies WACC higher and therefore profit lower, meanwhile financing with the help of debt provides tax shied and decrease WACC, therefore resulting into higher value of the company. As each company needs capital, of course the best way to obtain it is through sales. Sometimes the company is in a need of more immediate sources, but one should bear in mind that different sources may be appropriate for different stages of growth. Start-ups often rely on family members, friends, or local associates. As you grow, you may need to turn to alternate sources such as Venture Capital. Once you have achieved a financial track record, you can turn to other sources such as Asset Based Lending or Commercial Loans Bibliography: 1. Callaghan, Joe, and A. Murphy. 1998. An Empirical Test of a Stochastic Cash Flow Theory of Evaluating Credit. Advances in Financial Planning and Forecasting 8: 31-51. 2. Murphy, Austin. 2003. Practical Financial Economics. Westport, CT: Praeger Publishers. 3. Murphy, Austin. 2000. Scientific Investment Analysis. Westport, CT: Quorum Books. Read More