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By David Munro (auth.)

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Suffice it to say for the moment that a well-trained lending staff is an institution’s best defense against bad loans. Money and time invested in training credit staff will pay off later in low default rates and savings in legal and other administrative fees associated with attempts to collect the bad loans made by inadequately trained bank staff. Note 1 Production workers’ salaries and maintenance should be part of Cost of Goods Sold. But to make life easier, we are including them in Operating Expenses (and we are ignoring depreciation altogether).

The answer, of course, is automation. But it has to be intelligent automation and a prior investment in Loan Officer training must be made to ensure that the inevitable compromises an automated process entail do not obscure or override credit risk warning signals, signals that would not be detected by a clerk with no credit analysis training. 1057/9781137373786  A Guide to SME Financing 2 automated loan limits based upon automated account turnover analysis and pre-loaded Cost of Goods Sold percentages; 3 automated production of an opening balance sheet and income statement as well as a cash budget through the life of the loan; 4 one site visit by Loan Officer; 5 visit of outside evaluator to appraise fixed assets and, possibly, inventory (the non-refundable cost of which is borne by the applicant); 6 branch approval followed by review of application materials by a centralized Loan Production Team who make the final decision as to whether or not to extend credit;* 7 submission of documents by borrower and signing of agreement.

However, two further adjustments to the Balance Sheet are required for the next day’s balance sheet (the year-end): we need to retain earnings for year 20x1. In the projected Income Statement, Net Income Before Interest and Taxes was 2,940. 12) Assume a tax rate of 50: This gives us Net Income of 1,462 after payment of 1,462 in taxes. If retained within the firm, Cash increases by 1,462 and Owner’s Equity increases by 1,462. And, we repay the loan, which therefore does not show up on the annual balance sheet at all!

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