CRC Dimension 1

Dimension 1 Overview

• Dimension 1 offers insights and tools for scrutinizing a client's Evaluation of industry, markets, and competitors.
• Key topics include industry evaluation, product life cycles, industry risks, key sector features, and market competition analysis.

Evaluating the Client's Industry

• Understanding a company's industry is crucial for assessing lending risk.
• Insights help determine if a company's business strategy aligns with industry characteristics and economic trends.
• Key Topics included in the discussion are Industry/product life cycles, industry risks, and characteristics of key industry sectors.

Industry/Product Life Cycles

• Businesses are influenced by industry and product life cycles, not just general features.
• The life cycle stages affect industries, companies, and products, determined by market acceptance.
• Sales for a successful product increase, stabilize, and eventually decrease.
• Analyzing sales of products like light pickup trucks, personal computers, and cassette tapes can help to understand product life cycles.
• Product life cycles depend on product demand and its elasticity.
• Demand is a need or desire for seller's offerings of goods and services.
• Inelastic demand - price changes minimally affect product demand.
• Elastic demand - product quantity demanded changes proportionally with price changes.
• Demand becomes more elastic as products mature, with increased price sensitivity.
• This demand flattening is a natural part of a product's life cycle, which leads to a decline in profit for mature products, companies, or industries.
• The emerging, growth, maturity, and decline stages concept can be applied to businesses and entire industries.

Evaluating Companies

• Optimistic sales projections may not materialize for growth-stage products due to new market entrants.
• Analyze each product line's life cycle before underwriting a loan for companies with diverse offerings.
• Understanding the life cycle stage of a single product or service is vital for structuring a repayment schedule.
• Inelastic demand offers an advantage, allowing easier price increases for cost and profit coverage.
• Inelastic demand can be short-lived due to competition or substitutes.

Emerging Stage

• Total sales are minimal with uncertain consumer acceptance.
• Cash flow may not cover startup and fixed production costs.
• Financial products and services required include Equity type financing, subordinate debt, and owner's personal borrowings
• Typical liabilities include accrued expenses, accounts payable, lines of credit (with sponsor guarantees), and real estate loans (with sponsor support).
• Potential strengths - high sales from unique positioning, little competition, high prices and margins, patents, and brand loyalty
• Potential risks - failure, varying production capacity, low margins, cash flow mismatch, poor product quality and lack of marketing strategy

Growth Stage

• Gaining product acceptance leads to rapid sales growth and attractive profits that attracts competitors.
• Evaluate factors crucial to a company's success and management's response to competition.
• Financial products required include Cash management services, revolving credit lines, long-term debt and export/mortgage finances.
• Possible strengths are increasing demand, high selling prices, and improved quality due to changes made in the emerging stage.
• Risks include increasing competition, production overcapacity, external funding source requirements.

Mature Stage

• Profitability peaks, stabilizes, and declines as competitors enter.
• Early market success is attributed to dominant market share, possibly from patents/copyrights.
• Competition drives prices down as product demand at higher prices decreases.
• Companies usually weather hard competition and market proven products or services that leads to less risky loan candidates
• Financial Products may include Cash management, revolving credit lines, long-term asset financing, and export/mortgage financing.
• Strengths are price stability and product loyalty.
• Risks include declining profits, low cost producers, and maximized competition.

Declining Stage

• Product demand and sales decrease.
• Profits decrease as sales no longer cover fixed costs, but some well-managed companies may find profit opportunities with a reduced customer base.
• The company may include cash management services, revolving lines of credit, long-term debt, export/mortgage financing, and trust services.
• Strengths are low advertising costs and eliminated competition.
• Risks are lower sales, substantial over-capacity, and inability to find skilled manufacturing labor

Industry Risks

• Industries face specific and generic risks that affect all businesses.
• Analyze risks in the context of a company's industry and strategy.
• Examine macroeconomic issues and impacts on an industry from regulatory, politics, labor and environmental standpoints
• Cyclicality - industries exposure to economic or business cycles.
• Seasonality - Industries exposure to climate or calendar buying trends
• Technology Risks - the degree to which production efficiencies may or may not have created new risks.
• Life Cycle Stage - how an industry being in a certain stage can affect its economic outlook
• Evaluate Business Process and product Risks, and the influence industry has on practices, processes and customer products.
• International Consiterations have on a firms process, stability, and ability produce

Macroeconomic Issues

• Most companies face macroeconomic challenges during their life cycle.
• Discuss issues with management, examining existing or potential problems that might affect their ability to repay loans.
• All companies must follow regulatory guidelines that can affect financial performance, while regulations requiring ongoing recertifications raise costs.
• Know regulations’ impacts on the cost of compliance versus the risk of noncompliance, and possible fines
• Environmental Costs includes liability for clean-up costs and fines for non-compliance can alter the financial health of a company.
• Loan documentation usually requires environmental compliance certificates.
• Enlist legal and environmental experts before giving loans if known environmental problems are apparent.
• Fluctuations currency affect profitability & repayment ability, needing assessment of international financial managers for risk management.
• Interest rates affect costs, labor must maintain product quality, and public opinion must maintain business.

Cyclicality

• Refers to how much an industry is impact by expansions and contraction/business cycles.
• It is important for economic cycles to have the most efficient instigation tactics to increase sales
• Lender should know how the expansion and contraction can impact customers to effectively distribute
• Investigate if consumer approach counters economic cycles to manage potential expansions and or fixed replacement
• Quality Management and industry associations are effective when considering economic cycles to have strong financial stability
• Assess a company's vulnerability to the business cycle and their financial strength.
• Consider the quality of their plan to manage economic cyclicality, and assess their ability to insulate themselves through thoughtful management.

Business cycle stages

• Early expansion - low interest rates, consumer credit, and good income lead to sales and company expansions.
• Late expansion - increased credit and consumer spending raises expenses and demand to dampen business expansion.
• Early contraction - decreasing future, less credit is demanded and added to product or capacity while production is placed on line.
• Later Contraction - business begin seeing new growth, with credit increase and demand decreases.

Seasonality

• Predictable business effects can have the possible for profit maximization in the absence of natural disasters
• This business can be made of of weather and climate, religious and cultural seasons in accordance other industries.
• Fluctuating Cash receipts are known to shift based on the economic season for short-term decline or temporary increase
• Altering cash requirements can length cash cycle.
• Seasonality impacts by lengthening cash cycle or increasing daily average sales.
• Seasonal sales are typically followed by increase in inventory, cash increase and drop for permanent levels
• Seasonal Cash may have extended terms and potential increases are reduced
• Seasonal receipt are influenced by when customers have funding allocations

Technology Risks

• Technological advances increase efficiency and cut personnel costs.
• Asses substantial costs for hardware, software, upgrades and interruptions,
• Evaluate systems for user friendliness, workforce training (or lack thereof), end-user compatibility, and support .
• Knowing where something fall among the product life-cycle is essential

International Considerations

• International risks need to be taken into consideration with the political community
• Risk compounding can have potential affects and consider raw material and workforce affect
• Currency with foreign competition, export, and overall trade affect
• Political and cultural stability, work, labor and skill assess must also be weighted.

Business Process and Products risk

• Factors introduce labor and supply to customer practice with great signicance
• Influence distribution and marketing effects on products with respect to product liability
• Evaluate technology investments in the company with strategies
• Monitor control with protect to value and intellection value
• Out sourcing can change the risk profile is an underutilized factor

Labor Relation Risks

• Constant skilled labor supplies is a core and business element to consider labor relations.
• When considering labor with constrains with manufacturing supplies consider the overall risk management with employee recruitment
• Find significant qualified labor shortages with high turnover rates, and training used to attract employees

Distribution Risk

• Constant customer management with correct interfacing has to be related
• Reviewing risk and point of success or failure can quantify sales, profits and operability
• Strategy and support that doesn't fall under the support base can indicate and limit construction depending on sale period.

Product and Service Risk

• Differentiation one companys ability to identify profile for service and particular product
• Product line diversification success extends adaption with customer demands at much product inventory volume.
• Stable expenses require consistent customer needs rather discursionary
• Tech industry has high rate of obsolescence, it is important long-term finance does not outweigh market cycle
• Demand of market profit margin and profit levels
• Products should be hard or cheap to product, to lower competition

Production Risk

• The exact nature and steps of the productions cycle need to be evaluated
• Check to asses process fabrication or other assemblage to asses the operation length/complexity
• Shutdown susceptibility can be attributed to labor unrest, raw material supply, equipment malfunction etc.
• Proper insurance of the processes for fixed assets or customer outsourced products
• Environmental factors that can arise are materials, chemicals and waste

Interllectual Proerty Risks

• Direct risk is the loss for which that is embedded in service for both control and evaluation
• Direct internal is the loss of access and critical risks that includes risks for property loss of integrity
• Copyright and trademark ownership is a sign of good will is in place as a method of authentication
• It is important to sign all confidentiality agreements and protect with research investment and monitor market/ competitor

Outsource Risk

• Strategy can increase risk profile with functions that were done previously to a point that are now very important
• Principals should always have credibility or former training and have a good reputation
• Stable finance is good factor and licensing should support a contract, if you have the capacity
• Credentials, intellection ability, finance licensing and tech need to be in depth

Other Risks

• All factors to account are important as the customer can make critical steps
• Assess for operational and financial success or issues pertaining to legal matters with employee morale for business

Characteristics of Key Industries

Characteristics of Manufacturing Companies

• Timing the production cycle is difficult with high maintenance and processes in making and selling
• Vertically integrated, manufacturers maintain investment inventory, there are 3 general manufacturing types
• Processors - fabricators and assemblers are in constant comparison to the vertical process
• It economical or integrated by just in time delivery fabricators and consumers

Assets of Manufacturing Companies

• A key to understanding a manufacturers risk is to analyze the inventory for the amount used
• Good supply of raw materials and labor is tied to work in products
• Goods and finished productions to fill customer inventories is an important investment.
• Slow product rotation is present in producers compared to sellers
• Greatly invest in assets to produce sales

Profitable Manufacturing Companies

• Profit relies on proportion of variable costs affected by the high end of price or added level
• Manufacturers have great control over and product liability

Characteristic of Wholesaling Companies

• Middle men are distributors that distribute with title and movement from value to value to those outside consumers
• To effectively produce the product as it is stored in the company well wholesalers tend to have great inventory turnovers as retailers manage demand
• More dependably of profitability compared to addedness

Characteristics of Educational institutes

• Influx to sources is to operate by receiving grants to fund business or semesters with good health
• Cash, large and fixed assets is also key that the institution can operate and manage itself
• Asset management is all linked to the correct and well sought out investment

Characteristics of Construction Companies

• Companies constantly experience an increasing number of cash receipts and competition
• Routine outflows, completion of construction projects and great investment into cash needs
• Retention helps aid in managing investment that supports and mitigares from significance assets
• Low inventory material reliance and dependence, and more reliance and dependence on other assets

Characteristics of Agriculture

• oriented and significant for inventory with risks to product for markets
• Consumer eating habits are key as well as regulatory and government procedures
• Cost is controlled by investment in both animal and land, and equipment are the tools to work with product

EVALUATING THE CLIENT'S

MARKET

• Evaluating the client's market is important to analyzing client's clients and suppliers, as well payment of receivables and the delivery of the product
• Look to analyze how much you depend on a given supplier and customer
• What entry and exit costs are, and vulnerability to those issues

Buyer/Supplier Profiles

• The characteristics of the industry's buyers and suppliers define many aspects of a borrower's market opportunity
• The number, sze and buyer types affect the market strategy
• The amount and size of each customer impacting process.
• Price becomes more valuable in competition, to provide quality and service.

Putting Competition in the Context of the Market

• Check strategic alignment as the question of how many competitors there are etc
• Consider production strategies on size
• Examine market share in the face of high market profits and incremental sales