A Practical Approach to Customer Financial Statement Analysis

The scope of the following presentation is based on the perspective of the trade creditor, who wants to
make sure that bills are paid within terms and who wants to assign a credit line to the customer. The level
of analysis required to make an informed credit decision depends on the customer requesting credit terms
and the amount of credit required. If the customer's financial condition is not strong and the credit request
represents a large portion of the subject company's net worth, the analysis would be quite detailed. After
completing the investigation, the analyst can determine whether to sell its goods or services to the
customer on open account and establish an appropriate line of credit.

There are several sources of information used in making a credit decision. These sources include
antecedent information, bank information, trade references, and the firm's financial statements with
accompanying notes.

Antecedent Information
Antecedent information presents a clear picture of the type of business the potential customer operates.
There are three primary sources used to collect antecedent information: your firm's credit application,
credit reporting agencies, and trade group meetings. (See The New Customer Credit Investigation)

The Credit Application provides:

• The business name and address

• How the business is organized
o Corporation
o Partnership
o Proprietorship
• Lines of business and method of operation
• Length of time in business

The Credit Agency's Report and Trade Group Meetings provide information on:

• The character of the principles

• History of the business
• Is the company currently involved in litigation
• How the firm meets its financial obligations

A review of the available antecedent information provides the basis for understanding the customer's
needs and requirements. From this information the analyst can often develop a mental picture of the
customer and what it would be like to do business with them.

Bank Information
Included in the credit application would be a request for bank information. The analyst should verify the
customer's banking relationship. He should inquire about both the deposit relationships and lines of
credit.
Information to be Verified:

• Length of Time as a Bank Customer

• Deposit Balances (Checking, Savings, CD's, etc.)
• Lines of Credit:
o Amount of Credit Line
o Loan Origination Date
o Current Availability on the Line
o Expiration Date
o Are There Any Loan Restrictions
o Are There Any Covenant Violations

The information provided by the bank can serve as a good indicator of the customerës ability to pay.
Covenant information is also very important. If the customer is in violation of one or more of the loan
covenants, the bank has the right to pull the line of credit. Even if the firm could finance its operations
internally, without a bank line, it is very likely that its pay patterns would slow down.

Trade References
The credit application would include a request for three or four of the customer's current suppliers. The
analyst would request that those suppliers provide the following information:

• Credit Line
• Supplier for What Length of Time
• High Credit
• Current Balance
• Payment Habits

The trade reference information provides a very good indication of what other suppliers consider to be
the credit worthiness of the customer at a given point in time. It is in the best interest of the customer to
provide references that paint the best picture. If the customer does not take care of his obligations to these
suppliers in a timely manner, you can be sure that your relationship with the customer will not be any
better.

Financial Statements with Accompanying Notes

Once you have drawn conclusions from the soft data, it is time to focus your attention on the hard data --
the financial statements. Often, financial statement analysis will confirm your preliminary impressions. In
addition, analyzing the financial statements enables you to concentrate more specifically on the sources
of payment. There are four major cash sources of a business: net profit, conversion of an asset to cash,
increase in liabilities, and increase in equity. It is necessary for a company to generate larger sources of
cash than uses of cash, if any capacity for debt repayment is to exist. The primary source of repayment
for short term liabilities is the conversion of an asset to cash. Usually the conversion of inventory to
accounts receivable to cash provides the method of payment.

As the credit grantor, you will most often be presented with two financial statements -- the income
statement and balance sheet. If the financial statements were prepared by a Certified Public Accountant,
the financial statements will include an opinion, income statement, balance sheet, statement of retained
earnings, statement of cash flows, and the accompanying notes to the financial statements.
Reliability of Financial Statements
Before you begin your analysis of the financial statements, you must assess the reliability of the financial
data. There are four basic types of financial statements: audited, compiled, reviewed, and management
prepared.

Audited Financial Statements

Audited statements offer the analyst the most reliability. Audited statements are prepared by a Certified
Public Accountant and undergo a rigorous examination. This objective, professional opinion provides
considerable comfort as to the quality of the financial statements. The financial statements are the
responsibility of management. However, the accountant is legally liable for what is said in the opinion.

The Auditor's Opinion is provided in the cover letter of the financial statements. The opinion defines how
much responsibility an auditor actually accepts.

Unqualified Opinion
means that the auditor is willing to take the maximum degree of responsibility. Look for phrases such as
except for or subject to in the opinion. These phrases tell you that the statements are not unqualified.

Qualified Opinion
means that the auditor assumes the maximum responsibility for the reliability of the statements except for
the items explained in the qualification.

Disclaimer of Opinion
due to serious scope limitations the auditor is unable to express an opinion and does not assume any
significant responsibility.

Adverse Opinion
as a result of material noncompliance to Generally Accepted Accounting Procedures (GAAP), the
Auditor concludes that the statements are not fairly presented.

Unaudited Financial Statements

Depending on your customer base, many of the financial statements that you work with may not be
audited. Many of these statements will be prepared by an accountant who does not express an opinion.
Unaudited financial statements prepared by an accountant fall into two categories referred to as
compilation and review.

Compilation
The accountant prepares the financial statements from the books and records of the client. The
compilation does not include any review or verification procedures. The accountant assumes no
responsibility or liability for the financial information.

Review
The accountant prepares the financial statements from the books of the client and performs limited
inquiry and analytical procedures. The CPA provides limited assurance that the statements conform to
GAAP.
Management Prepared Statements
Statements prepared by management are used most often for interim period analysis. However, if your
potential customer is a small business or privately held, the only financial information available for your
review may be management prepared statements. When reviewing management prepared statements,
antecedent information becomes very important in developing a framework for judging management's
character. Using antecedent information, you can determine if the management of the company is
trustworthy.

Level of Credit Investigation

The level of investigation is driven by the company's credit policy. (See Credit Policy) In the course of
doing business the credit department must set guidelines for the level of analysis required for establishing
credit lines. These guidelines are usually based on several factors: the industry that the firm operates in,
the size of the firm, and the firm's willingness to assume risk in order to grow market share.

A company's credit policy might establish the following guidelines for setting credit lines:

For credit lines under $25,000 the analyst is required to review:

• A completed credit application

• Contact bank references to determine account balances and loan availability
• Contact trade references to determine the credit line granted, activity, and payment habits

From those three sources of information the analyst would make a decision whether to offer open account
terms and determine the credit line that would be established.

For credit lines from $25,000 up to $100,000 the level of analysis would be increased to include the
above information, plus:

• A credit report from a reporting agency that includes payment history and antecedent information.
• The prior three years financial statements from the potential customer.

This level of information would provide the necessary basis for the analyst to make his credit decision.
He could determine the potential customer's payment habits, what other suppliers in the industry were
doing, if there was cash in the bank, or availability on a line of credit, and the financial health of the
business.

The analyst would begin his analysis of the financial statements by reviewing the Accountant's Opinion.
If the accountant found any irregularities with the firm's financial reporting or management's behavior, it
would appear in the opinion.

He would also read through the accompanying notes to the financial statements and determine if there
were any: accounting policies of an unusual nature that were being used; significant contingencies or
potential litigation; any large maturity that would come due in the coming year that would impact their
future cash flow; or any event that occurred during the past year not appearing in the numbers.

The final step in the analysis would be to review the numbers. The analyst would determine if the
business had a solid equity base, compare the financial information to the industry, insure that the firm's
working capital position was adequate, and if the business was profitable. Based on his analysis of these
criteria, he would make a decision whether to sell the account on open terms and at what level to
establish the credit line.

For credit lines above $100,000 additional approvals would be required.

• The Credit Manager, Director of Credit, and the Chief Financial Officer would have different
levels of credit line authority. As the potential customer's credit requirement increased, different
levels of sign-off would be required.

The analyst would follow all the steps previously discussed, however the review of the financial
statements would be more in-depth. When the analysis requires additional approvals, the analyst usually
spreads the financial statements and calculates a number of ratios. He also provides a very concise
narrative highlighting any significant issues and makes a recommendation to management. After the
credit request has the appropriate approvals, the credit line is assigned.

Although the Credit Policy discussed above may not hold true for your organization, the basic concept
probably does. Increasing levels of exposure, present higher levels of risk, and therefore require different
levels of analysis.

Financial Statement Analysis

Much of the information considered when evaluating a company's financial strength is derived from the
financial statements, notes to the financial statements, and commentary that supplement the financial
statements. The notes to the financial statements explain the accounting polices of the company and often
provide detailed explanations of how those polices were applied.

Sometimes the notes are used to explain specific management actions and the reasons for those actions.
The notes to the financial statements must be read carefully if the statements are to be understood fully.
The basic financial statements are, of course, the balance sheet, the income statement, the statement of
cash flows, and the statement of retained earnings.

Analysis of financial statements often involve some transformation of the reported data. Techniques such
as ratio analysis, percentage analysis, and comparison to industry data make it possible to identify
significant relationships in a company's financial data. These analysis techniques are most effective when
they are applied to data for several accounting periods, which usually is possible because most companies
report two years of comparative financial statement data at each report date.

The analysis of financial statements, if it is to be a thorough analysis, may be divided into three parts: the
firm's profitability, capital position, and liquidity position.
Operating Performance
Analyzing the operations of a business involves the process of carefully reviewing the income statement.
Management's ultimate goal should be to maximize the return to stockholders, and net income probably
is the best single measure under management's control of how well that goal has been achieved. The
operating results a company achieves will often weigh equally with the balance sheet in determining
whether to extend credit on open account.

The income statement is the summary of the revenue and expenses of the business for a specific period of
time. Using a technique know as common-sizing the financial statements, we can gain an understanding
of the trends of expenses and profit margins that occur over time. Using the financial statements of Star
Stores, Inc., we will demonstrate the use of common-size statements spread over several years. As
illustrated in the common-size income statement of Star Stores, Inc., each category is calculated as a
percentage of sales. (Exhibit 1) When we spread several years of financial data side by side we can gain
significant insight into trends within the company. As is highlighted in our example, Star's gross margin
has continued to erode over the last three years. Gross margin is the revenue generated in excess of cost
of goods. This red flag would lead to the question of why? The company's response might indicate that
due to increased competition over the last several years, the company was required to lower its price to
maintain market share.

We can use a technique know as comparative analysis, which compares the operating results of the
company under investigation with companies in the same industry. The industry average for department
stores (Star's industry) appears in the far right hand column. Industry averages are compiled and updated
annually by Robert Morris Associates and Dun & Bradstreet. Such comparisons provide a benchmark for
assessing how well the company's management has performed in relation to others in the industry. We
can determine if the erosion in gross margin is industry wide. Since Star's gross margin is about the same
as the industry, it is reasonable to assume that competitive pressures did in fact force the decrease in
gross margin over the past three years.

We would continue our review of each category in the income statement, looking for significant
deviations in performance from year to year and comparing each category to the industry. Operating
expenses as a percentage of sales often increase from year to year. If there were significant increases,
questions could be raised to determine if the increases were due to non-recurring expenses. Since net
income is often the primary source of cash for a business, we would zero in on whether the potential
customer's net income was increasing or decreasing from year to year. We would also compare the trend
between net income and sales.

Using profitability ratios and the trends between those ratios, we can draw conclusions of how efficiently
the company has operated in the past and how it is likely to operate in the future. Profitability ratios are
helpful for evaluating management's success in generating returns for those who provide capital to the
company. We will discuss three profitability ratios: Profit Margin on Sales, Return on Total Assets,
Return on Stockholders' Equity.
Profit Margin on Sales
is calculated by net income divided by net sales. This ratio indicates the return a company receives for
each dollar of sales. We would compare the trends of the last several years and compare the ratio to the
industry average.

Profit Margin on Sales = Net Income

Net Sales

Return on Total Assets

measures how efficiently the company uses its assets. It indicates the net income generated per dollar of
invested assets. By comparing the customer to the industry, we can determine if the company has
purchased more capital equipment than it really needs. If it is determined that profitability is a problem,
examine the income statement to find the causes of the difficulty.

Return on Total Assets = Net Income

Average Total Assets *
* Average Total Assets = (Begin Total Assets + End Total Assets) / 2

Return on Stockholders' Equity

relates the net profit of a business to the investment made by the firm's owners. ROE is often used to
compare two or more businesses in one industry. ROE summarizes management's success at maximizing
the return to common stockholders.

It also determines if the company will be attractive to other investors.

Return on Stockholders' Equity = Net Income - Preferred Dividends

Average Common Stockholders' Equity

Using common-sized financial statements compared to industry averages, we can identify trends that lead
us to develop an impression of a prospective customer. Using ratio analysis we can solidify our opinion
of how effective the management operates the business.

Financial Position
Our analysis of financial position will focus on the long term indicators of risk taken from the balance
sheet (Exhibit 2). As a trade creditor we are concerned about the riskiness of our customers. We can use
leverage ratios to provide information about the relative emphasis on debt in the capital structure of the
company. We can also determine if the company has the ability to service both its current and long-term
debt. Our analysis of the capital structure will be based on two ratios: Total Liabilities to Total Assets and
Times Interest Earned.
Total Liabilities to Total Assets
provides information about the company's ability to absorb asset reductions arising from losses without
risking the interests of creditors. It is the relationship between borrowed funds and the assets of the
company. If borrowed funds increase more rapidly than the company's net worth, outside creditors
assume more operating risk. Loan covenants often require companies not to exceed specified levels of the
total liabilities to total assets ratio. This presents additional risk for creditors. Generally, the more stable
the historical income, the greater the likelihood that creditors will tolerate increased debt. We can use the
common-size statements to determine if our potential customer is assuming more risk. By comparing the
company to the industry we can determine if the company is carrying to much debt.

Total Liabilities to Total Assets = Total Liabilities

Total Assets

Times Interest Earned

is used in determining if the prospective customer has the ability to make interest payments on its debt. It
is Income Before Interest and Taxes divided by the Interest Expense. It is very important to all creditors
that the customer have the ability to cover its interest expense. Creditors prefer a high value for this ratio
because a high value indicates the operating income available to pay interest will be well in excess of
annual interest expense.

Times Interest Earned = Income Before Taxes + Interest Expense

Interest Expense

Our analysis of the balance sheet allows us to determine if the customer is leveraged and if it has the
ability to pay the interest expense generated by the debt. Star's capital structure is solid. Its Total
Liabilities to Total Assets has remained at about 47% over the past several years, while the industry
average is 65.9%. Star's ability to cover its interest payments is also favorable. Its Time Interest Earned
ratio for the last year was 1.9 to 1, compared to the industry average of 1.7 to 1.

Liquidity Analysis
Although analysis of the customer's profitability and capital position are important, the most important
factor to the trade creditor is the customer's liquidity position. We can begin to analyze the liquidity and
quality of the current assets by calculating the current ratio. The current ratio is the relationship of
current assets to current liabilities.

Current Ratio = Current Assets

Current Liabilities

It is an indicator of the customer's ability to meet its short-term obligations with current assets. The trade
creditor wants to know if current obligations can be met when they are due? As a general rule a ratio of 2
to 1 is adequate protection for trade creditors. As a short-term creditor, we can feel reasonably secure
about receiving payment when it is due. We should be very concerned if the customer has a low current
ratio. At best we will not receive prompt payment. Often it indicates a short-term cash flow problem that
if not corrected can force the company into bankruptcy. The current ratio should be evaluated in light of
the company's management plans, as well as industry and general economic conditions.
A word of caution, the Current Ratio can be manipulated by management. This activity is known as
window-dressing. It is important that you keep in perspective the information that is derived from any
single financial ratio.

The strength of the current ratio can be tested by calculating the quick ratio. The quick ratio excludes
inventory from the calculation. Inventory is usually the less liquid of the current assets. The closer the
quick ratio is to the current ratio the more liquid the current assets.

Quick Ratio = Current Assets - Inventory

Current Liabilities

When evaluating the quick ratio it is important to review the company with an industry perspective.
Some industries may have very liquid inventories while other normally liquid current assets, such as
receivables, may be comparatively nonliquid.

Du Pont Ratio Analysis

The Du Pont Ratio Analysis is a combination of financial ratios in a series to assess investment return. It
combines financial ratios using both the income statement and balance sheet to assess either the Return
On Investment or the Return On Equity. The benefit of the method is that it provides an understanding of
how the company generates its return. This analysis provides insight into the importance of asset turnover
and sales to the overall return. The formula shows the relationship of profit margin and turnover and how
the two complement each other. The formula also indicates where there are weaknesses.

The analyst can also gain an understanding of how the firm uses debt to generate its return. The Du Pont
Ratio allows us to brake down Return On Equity into three component parts: net profit margin, total asset
turnover, and the company's use of leverage.

Du Pont Ratio Analysis

Return On Equity = Return On Assets x Financial Leverage

ROE = Net Income ROA = Net Income Financial Leverage = Assets
Equity Assets Equity
Return On Assets = Pretax Profit Margin x Total Asset Turnover
ROA = Net Income Pretax Profit = Net Income Total Asset = Sales
Assets Margin Sales Turnover Assets

Our analysis of Star (Exhibit 3) reveals that it turns its assets about 1.4 times a year with a Return On
Assets of 2.46%, which generated a 4.6% Return On Equity.
Cash Flow
The statement of cash flows (Exhibit 4) shows the cash provided by, and used by the operating, investing,
and financing activities of a company for a defined period of time. Operating activities relate to a
companyës primary revenue generating activities. The cash flows from operating activities are generally
the cash effects of transactions included in the determination of income. Investing activities include
lending money and collecting on those loans, buying and selling securities not classified as cash
equivalents. Financing activities include borrowing money from creditors and repaying the amounts
borrowed, and obtaining resources from owners and providing them with both a return on their
investment and a return of their investment.

The Financial Accounting Standards Board (FASB) allows two approaches to reporting cash flows from
operating activities: the direct approach and the indirect approach. FASB encourages the use of the direct
approach. However, the indirect approach is the more widely used method of displaying cash flows.

Cash Flow from Operating Activities

The major recurring inflow of cash for most companies is from sales of their primary products. Operating
cash outflows include payments to suppliers of merchandise, payments to employees, interest payments,
and taxes. Since the income statement is grounded in accrual accounting, the equality between net
income and cash flow from operating activities is rarely equal. As is demonstrated in our example of
Star's Statement of Cash Flow, the company's operating activities generated a net cash balance of
$25,688,400.

Cash Flows from Investing Activities

Investing activities include purchases and sales of productive assets that are expected to generate
revenues over long periods of time; purchases and sales of securities that are not classified as cash
equivalents; and, lending money and collecting interest on those loans. In our Statement of Cash Flows
example Star incurred an outflow of ($11,777,000) for the purchase of equipment and land. Star's net
cash used in investing activities was ($10,799,000).

Cash Flow from Financing Activities

Financing activities include borrowing money from creditors and repaying the amounts borrowed, and
obtaining resources from owners and providing them with both a return on their investment and a return
of their investment. In our example, Star purchased ($16,415,600) of its common stock. The company
increased its use of LTD by $1,343,200. The net cash used by financing activities was ($15,072,400).

Next, we sum the net changes in cash for each of the three sections: operating, investing, and financing.
This total represents the net increase or decrease in cash for the period under investigation. The net
change in cash for the period is added to the beginning of the year cash balance to determine the cash
balance at the end of the year.

Information reported in the Statement of Cash Flows, when used with other financial statement
information, helps the analyst assess a company's future cash flow potential. It also helps the user to
assess a company's ability to pay its debts. Finally, the cash flow statement allows us to understand the
differences between the company's income flows and cash flows.
Operating Cycle
The operating cycle (Exhibit 5) refers to the circulation of items within the current assets. The operating
cycle is the process of purchasing inventory, converting it into accounts receivable and collecting the
receivables. The average lapse of time between the investment and final conversion back to cash is the
length of the operating cycle. The average length of time necessary to complete this cycle is an important
factor in determining a company's working capital needs. A company with a very short operating cycle
can manage comfortably on a relatively small amount of working capital. A long cycle requires a larger
margin of current assets to current liabilities, unless the credit terms of suppliers can be extended.

The average length of the operating cycle can be roughly estimated by adding the number of days it takes
to sell inventory and the number days it takes to convert receivables into cash.

The length of time required to sell the inventory is referred to as Days of Inventory on Hand. We begin
the calculation by determining the inventory turnover. Inventory turnover represents the total cost of all
goods that have been moved out of inventory during the year. This is represented by the cost of goods
sold taken from the income statement. Therefore, the ratio of Costs of Goods Sold to Average Inventory
during any period measures the number of times that inventory turns over and must be replaced. For
example, in 1999 Star's cost of goods sold were $223,222,000 and its average inventory level is
$58,777,000. By dividing COGS by Average Inventory we can determine that Star turned its inventory
about four times.

Inventory = Cost of Goods Sold = $ 223,222,000 = 3.7 inventory turns per year
Turnover Average Inventory $ 60,799,000

The analysis can be extended to determine the number of days that were required to turn the inventory.
This calculation is referred to as Days Inventory on Hand. In our example:

Days Inventory on Hand 365 Days = 99 days

Inventory Turnover

We complete our operating cycle calculations by determining the length of time required to convert
receivables to cash. This is referred to as the Average Collection Period. We begin this calculation by
calculating Accounts Receivable Turnover. Unless a firm has a significant amount of cash sales, the total
sales for any period represents the flow of claims into receivables during the period, the result is a rough
indicator of the number of times the company's receivables turnover during the year. For example, Star's
annual sales in 1999 were $340,591,000 and its Accounts Receivable balance was $62,352,200. By
dividing Sales by Average Accounts Receivable, we can determine that Star turns its A/R 5.46 times a
year. We can extend our calculation to determine the number of days it takes to collect the accounts
receivable. Average Collection Period is calculated by dividing 365, the number of days in the year, by
Accounts Receivable Turnover. The result is the average length of time necessary to convert receivables
to cash.

Average Collection Period = 365 Days = 66.85 Days

Receivable Turnover *
* Accounts Receivable Turnover = Sales
Accounts Receivable
In our example, if Star offers 60 day terms to its customers, the calculation reveals that its customers are
only paying about 6.85 days beyond terms. Most credit managers would consider these results
satisfactory.

By combining the Days Inventory on Hand with the Average Collection Period, we gain an
understanding of the length of time required by Star to complete its Operating Cycle. In our example,
Star completed the operating cycle in 163 days.

Operating Cycle
Days Inventory on Hand 99
Average Collection Period + 67
Days Required to Complete the Cycle 166

Determining the operating cycle is important for two reasons: first, we can compare these results to
similar companies or to industry averages to determine how efficient the company manages its current
assets. Most importantly, however, the operating cycle analysis can be extended to determine if Star has
adequate working capital to meet its operating requirements. Trade creditors are paid with cash generated
by the conversion of current assets. Working capital is the gap between current assets and current
liabilities. If our analysis reveals a deficit in working capital, we must determine how Star plans to pay its
obligations in a timely manner.

The final step in estimating working capital requirements is to calculate Days Payable Outstanding. Days
Payable Outstanding is equal to 365 days divided by Payables Turnover. Payables Turnover is calculated
by dividing purchases for the period under investigation by Accounts Payables. Purchases equal ending
inventory less beginning inventory plus cost of goods sold. Accounts Payable is the ending payables
balance taken from the balance sheet.

Days Payable Outstanding = 365

Payables Turnover
Payables Turnover = Purchases / Payables

Purchases = Ending Inventory - Beginning Inventory + Cost of Goods Sold

Payables = Accounts Payable balance taken from the Balance Sheet

Days Payable Outstanding is an estimate of the length of time the company takes to pay its vendors after
receiving inventory. If the firm receives favorable terms from suppliers, it has the net effect of providing
the firm with free financing. If terms are reduced and the company is forced to pay at the time of receipt
of goods, it reduces financing by the trade and increases the firms working capital requirements.

Star's Comparative Operating Cycle vs. Industry

Days Inventory on Hand 99 104
Average Collection Period + 67 + 70
Operating Cycle 166 174

Days Payable Outstanding - 29 - 31

Days to be Financed 137 143
Working Capital Available is determined by subtracting Current Liabilities from Current Assets.
Working Capital Required is equal to Purchases divided by (365 / Days to be Financed). If Working
Capital Available exceeds Working Capital. Required, the firm has adequate working capital to meet its
current obligations. The Operating Cycle can be used to determine if the potential customer has the
ability to meet our payment terms. In our example, Star has a strong Working Capital position. Working
Capital Available has exceeded Working Capital Required in two of the past three years.

Recommendations
The next step of the analysis would be to develop a narrative about the findings. During the analysis
notes should be made as to the type of opinion given by the accountant and key events or procedures that
are referenced in the notes of the financial statements. Events that might have an adverse effect on the
future of the business such as loan covenant violations or significant current maturities that would be
coming due, should be documented in the narrative. The highlights of the financial statements would also
be discussed, including both positive and negative factors. Any facts pertinent to the deal or transaction
that initiated the account review would be included in the write-up. A recommendation for a course of
action to be taken is the final step in the process. It could include a statement that the account should be
given open terms and the amount of credit line to be established, or that the account is not recommended
for open terms and an alternative (such as a type of security) would be suggested. The narrative would be
prepared as a one page executive summary, with supporting analysis attached.