FINANCIAL MANAGEMENT
GENERAL INTRODUCTION
3 parties closely involved in financial management, they appreciate the value of good information
1. Managers: they want to make good decisions + how much profit is made and how?
2. Investors: they need to have knowledge, to see if it’s worth investing ROI
3. Financial institutions: need to decide whether to give a loan or not
Financing for professional purposes
C1- BANK CREDITS
1.1 REPAYMENT CAPACITY
1.1.1 CREDIT GRANTING FACTORS
4 factors the bank takes into account when granting a loan:
1. Repayment capacity: ability to pay back loan
2. Quality of management: experience management (young/old knowledge of the sector)
3. Ratio of risk: for the bank & return on the credit application (guarantees reduce risk, inside or outside
the company
4. Own effort/commitment of the entrepreneur
They try to find an answer on 6 questions: Who? What? Which? With what will you repay it?
Guarantees? Profit?
1.1.2 REPAYMENT CAPACITY
Repayment capacity = the answer on the question: Can the company repay the annual instalments of
capital & interest?
we need to calculate the repayment capacity
Cash flow = amount of financial resources that has resulted from the operation of the company during a
certain period
Cash flow = result of the period + non-cash expenses
Cash flow is the gross self-financing & is calculated assuming that: result of period = cash flow
• Difference between incoming & outgoing cash, needs to be positive
• Income = receipts
• Charges = payments
Non-cash expenses = charges that are never paid:
• Depreciation = decrease in value on FA
• Amounts written down = value of CA (inventory, am. receivable, bank & cash)
• Provisions = spread an amount of money over a few years
Comments before we speak of RC:
• Current portion of debts after 1 year deducted from cashflow
• Non-recurring result deducted from cashflow
• Annual repayment of new loan last to be taken into account
,Calculate repayment capacity:
- current portion of debts after one year
-/+ non-recurring result
- payment of the requested credit
Calculation Code annual accounts
Cash flow (result of the period 9904 + 630 + 631/4 + 635/7
+ depreciations + am. written
down + provisions)
-Current portion of debts on -
more than 1 year
42
+Non-recurring charges -76A/B
-Payment (capital & +66A/B
interest) for the 1st year of
the requested credit
= Repayment capacity
Alternatives if RC<0 : (improve weak RC)
• Borrow less
• Increase term of loans: longer-term borrowing
• Private solidarity guarantee (strongly discouraged)
• Bullet credit/loan: take out a bullet loan
= loan whereby only interest is repaid to the bank each month, the capital is repaid once at the end of
the loan
(full amount must be available on final maturity date)
See exercises from p.12 to p.32!!
1.2 CREDIT OPENING
If a company applies for a ‘credit’, a global framework is created kind of basket/credit opening/credit
facility
Then they will decide with which types of credit they will ‘fill’ the basket they will make sure a credit
opening is sufficiently
guaranteed
,Over time, parts will be repaid, is credit opening is not fully
utilized with credit margin
If the borrower now wants to take out another loan, this can
be down by drawdown existing credit opening
Advantage of working like this?
• Establishing guarantees is expensive
In case of margin in credit opening: guarantee
remains possible guarantees to be refunded
• Now you do not have to start up a new credit file, no new analysis necessary
Establishing guarantees = expensive, by working with credit opening, the guarantee continues to exist
Why is the total amount of the guarantees higher than the amount of the credit facility?
When a company no longer is able to repay its debts, interests continue to accrue. The bank also incurs
additional costs to lift the guarantees. Guarantees are higher to cover these costs
The borrower wants to take out a new investment credit for an amount of 50 000 euro, on
march 1 2023. Can this be included within the existing credit opening?
First capital repayment 31/12/2021
Yearly repayment of capital? =120 = 24 000
31/12/21: 24 000
31/12/22: 24 000
48 000 (=margin) has already been repaid
not high enough for an extra credit of 50 000 euro
Do you have any idea how it will be solved if the margin of the credit opening is insufficient to
take out additional credit?
Margin is insufficient: temporarily lower the maximum of another credit (in this case, the cash credit)
Give additional guarantees
Get the new credit on notoriety (w/o extra guarantees, because you have a good relationship with your
home banker)
The house banker sometimes works without (additional) guarantees. An entrepreneur wants
to take out a credit wants to play out the competition between 2 banks, namely between his
house banker where he has been a (credit) customer for years and a new bank. The house
banker wants to grant the credit without extra guarantee, the new bank requires a guarantee.
Can you explain why the house banker can do this?
After years of relationship, the house bank knows the quality of the company & wants to give an additional
credit w/o extra guarantee. For the other bank, the company is completely unknown and therefore riskier.
+ prestige if you, as a bank, have helped to build the company = business card
What is the difference between a credit and a loan?
• Credit: possible re-use of the amount already repaid (ex. Investment credit for a building, 500 000 in
10 years: in Y4 you already have repaid 200 000)
Advantage: you take on a new credit taking the conditions of the old credit (ex. Interest rates
• Loan: no re-use possible (ex. Car loan, you take a loan and pay back each month & its not bc you
already paid back a lot of it you can’t reuse the paid-back money another time)
, 1.3 GUARANTEE FORMS
In order to cover credit risk the bank will ask for guarantees, if company cannot meet obligations bank
recovers debts via guarantees
Elements that determine composition & € of guarantee:
• Form of credit & need for credit
• Forward-looking & realistic business plan
• Solvency of the company
Expected guarantee must be in proportion to credit
The borrower is a guarantor with all its assets
Guarantee: regulates the priority grade
1.3.1 MORTAGE
= a security on tradable property (land & buildings)
• On real estate/property
• Grade to determine the priority
• Multiple mortgages on same property: mortgage in 1st grade, 2nd grade, ...
Example: mortgage on an industrial building
• Mortgage in 1st grade: € 50 000 KBC
• Mortgage in 2nd grade: € 70 000 ING
• Mortgage in 3rd grade: € 100 000 Belfius
Debt situation at time of bankruptcy (sale of industrial building: € 180 000) Bank balance outstanding
• KBC €45 000 1st grade €45 000 compensated (balance of 135 000)
• ING €60 000 2nd grade €60 000 compensated (balance of 75 000)
• Belfius €95 000 3rd grade remaining € 75 000 still needs €20 000, line up w/other creditors
1.3.1.2 MORTGAGE - DEED
Authentic deeds by the notary
• Drawing up of deed (between company and bank) = mortgage deed
• Mortgage registration in mortgage office (first registration determines the grade!)
• Mortgage deed ≠ Deed of purchase (or deed of sale)
• Both deeds incur costs although they are usually written just after each other
Mortgage deed = Borrower grants mortgage to bank this deed establishes mortgage
Deed of purchase = Deed regulates transfer of ownership between seller & buyer
Problem?
1. Mortgage can only be established by owners of the property
2. Bank only is willing to release € if guarantees are established
3. Borrower needs money of loan to become owner of the property & thus to be able to give a mortgage
Solution
1. Mortgage deed is established & notary provides document to the bank
GENERAL INTRODUCTION
3 parties closely involved in financial management, they appreciate the value of good information
1. Managers: they want to make good decisions + how much profit is made and how?
2. Investors: they need to have knowledge, to see if it’s worth investing ROI
3. Financial institutions: need to decide whether to give a loan or not
Financing for professional purposes
C1- BANK CREDITS
1.1 REPAYMENT CAPACITY
1.1.1 CREDIT GRANTING FACTORS
4 factors the bank takes into account when granting a loan:
1. Repayment capacity: ability to pay back loan
2. Quality of management: experience management (young/old knowledge of the sector)
3. Ratio of risk: for the bank & return on the credit application (guarantees reduce risk, inside or outside
the company
4. Own effort/commitment of the entrepreneur
They try to find an answer on 6 questions: Who? What? Which? With what will you repay it?
Guarantees? Profit?
1.1.2 REPAYMENT CAPACITY
Repayment capacity = the answer on the question: Can the company repay the annual instalments of
capital & interest?
we need to calculate the repayment capacity
Cash flow = amount of financial resources that has resulted from the operation of the company during a
certain period
Cash flow = result of the period + non-cash expenses
Cash flow is the gross self-financing & is calculated assuming that: result of period = cash flow
• Difference between incoming & outgoing cash, needs to be positive
• Income = receipts
• Charges = payments
Non-cash expenses = charges that are never paid:
• Depreciation = decrease in value on FA
• Amounts written down = value of CA (inventory, am. receivable, bank & cash)
• Provisions = spread an amount of money over a few years
Comments before we speak of RC:
• Current portion of debts after 1 year deducted from cashflow
• Non-recurring result deducted from cashflow
• Annual repayment of new loan last to be taken into account
,Calculate repayment capacity:
- current portion of debts after one year
-/+ non-recurring result
- payment of the requested credit
Calculation Code annual accounts
Cash flow (result of the period 9904 + 630 + 631/4 + 635/7
+ depreciations + am. written
down + provisions)
-Current portion of debts on -
more than 1 year
42
+Non-recurring charges -76A/B
-Payment (capital & +66A/B
interest) for the 1st year of
the requested credit
= Repayment capacity
Alternatives if RC<0 : (improve weak RC)
• Borrow less
• Increase term of loans: longer-term borrowing
• Private solidarity guarantee (strongly discouraged)
• Bullet credit/loan: take out a bullet loan
= loan whereby only interest is repaid to the bank each month, the capital is repaid once at the end of
the loan
(full amount must be available on final maturity date)
See exercises from p.12 to p.32!!
1.2 CREDIT OPENING
If a company applies for a ‘credit’, a global framework is created kind of basket/credit opening/credit
facility
Then they will decide with which types of credit they will ‘fill’ the basket they will make sure a credit
opening is sufficiently
guaranteed
,Over time, parts will be repaid, is credit opening is not fully
utilized with credit margin
If the borrower now wants to take out another loan, this can
be down by drawdown existing credit opening
Advantage of working like this?
• Establishing guarantees is expensive
In case of margin in credit opening: guarantee
remains possible guarantees to be refunded
• Now you do not have to start up a new credit file, no new analysis necessary
Establishing guarantees = expensive, by working with credit opening, the guarantee continues to exist
Why is the total amount of the guarantees higher than the amount of the credit facility?
When a company no longer is able to repay its debts, interests continue to accrue. The bank also incurs
additional costs to lift the guarantees. Guarantees are higher to cover these costs
The borrower wants to take out a new investment credit for an amount of 50 000 euro, on
march 1 2023. Can this be included within the existing credit opening?
First capital repayment 31/12/2021
Yearly repayment of capital? =120 = 24 000
31/12/21: 24 000
31/12/22: 24 000
48 000 (=margin) has already been repaid
not high enough for an extra credit of 50 000 euro
Do you have any idea how it will be solved if the margin of the credit opening is insufficient to
take out additional credit?
Margin is insufficient: temporarily lower the maximum of another credit (in this case, the cash credit)
Give additional guarantees
Get the new credit on notoriety (w/o extra guarantees, because you have a good relationship with your
home banker)
The house banker sometimes works without (additional) guarantees. An entrepreneur wants
to take out a credit wants to play out the competition between 2 banks, namely between his
house banker where he has been a (credit) customer for years and a new bank. The house
banker wants to grant the credit without extra guarantee, the new bank requires a guarantee.
Can you explain why the house banker can do this?
After years of relationship, the house bank knows the quality of the company & wants to give an additional
credit w/o extra guarantee. For the other bank, the company is completely unknown and therefore riskier.
+ prestige if you, as a bank, have helped to build the company = business card
What is the difference between a credit and a loan?
• Credit: possible re-use of the amount already repaid (ex. Investment credit for a building, 500 000 in
10 years: in Y4 you already have repaid 200 000)
Advantage: you take on a new credit taking the conditions of the old credit (ex. Interest rates
• Loan: no re-use possible (ex. Car loan, you take a loan and pay back each month & its not bc you
already paid back a lot of it you can’t reuse the paid-back money another time)
, 1.3 GUARANTEE FORMS
In order to cover credit risk the bank will ask for guarantees, if company cannot meet obligations bank
recovers debts via guarantees
Elements that determine composition & € of guarantee:
• Form of credit & need for credit
• Forward-looking & realistic business plan
• Solvency of the company
Expected guarantee must be in proportion to credit
The borrower is a guarantor with all its assets
Guarantee: regulates the priority grade
1.3.1 MORTAGE
= a security on tradable property (land & buildings)
• On real estate/property
• Grade to determine the priority
• Multiple mortgages on same property: mortgage in 1st grade, 2nd grade, ...
Example: mortgage on an industrial building
• Mortgage in 1st grade: € 50 000 KBC
• Mortgage in 2nd grade: € 70 000 ING
• Mortgage in 3rd grade: € 100 000 Belfius
Debt situation at time of bankruptcy (sale of industrial building: € 180 000) Bank balance outstanding
• KBC €45 000 1st grade €45 000 compensated (balance of 135 000)
• ING €60 000 2nd grade €60 000 compensated (balance of 75 000)
• Belfius €95 000 3rd grade remaining € 75 000 still needs €20 000, line up w/other creditors
1.3.1.2 MORTGAGE - DEED
Authentic deeds by the notary
• Drawing up of deed (between company and bank) = mortgage deed
• Mortgage registration in mortgage office (first registration determines the grade!)
• Mortgage deed ≠ Deed of purchase (or deed of sale)
• Both deeds incur costs although they are usually written just after each other
Mortgage deed = Borrower grants mortgage to bank this deed establishes mortgage
Deed of purchase = Deed regulates transfer of ownership between seller & buyer
Problem?
1. Mortgage can only be established by owners of the property
2. Bank only is willing to release € if guarantees are established
3. Borrower needs money of loan to become owner of the property & thus to be able to give a mortgage
Solution
1. Mortgage deed is established & notary provides document to the bank
