Commercial Awareness, the Lender's Way

Commercial awareness is the most-asked and least-taught thing in a graduate interview. The question comes in costumes — tell me about a company in the news, what are the risks for this client, why did that retailer fail, what would you want to know before taking this on — but underneath each one is the same test: can you say how a business makes money, what could stop it, and what that means for a decision. Candidates prepare for it by reading the news, which gives them things to repeat. The panel is listening for something it can use.

A bank cannot lend to a business without answering that test, every time, in writing, with its own money at stake. So the fastest way to build the awareness a panel wants is to read a company the way a lender does — not because you are going to lend to it, but because the lender's questions are the ones that find the business under the story.

Every commercial loan answers five questions about the borrower before it is written. They are the same five for a brewery and a bank, a farm and a listed retailer, and they are asked in this order because each one changes how the next is read.

The order matters. Who pays, and when, tells you whether revenue is cash or a promise. Whether the money arrived tells you whether the profit is real. What it owes tells you who else is reading this business and when they can act. What would stop it is the risk you will be asked about; it is almost never the one in the news. And who is running it is the question a lender asks last and weighs first, because every other answer was produced by those people.

Take the last annual report of the company you have been asked about, or the one you expect to be. Do not read it from the front — the front is the company's speech. Go to the revenue note: who pays, in what proportions, on what terms, and whether the biggest customer or channel has grown. Then the cash flow statement beside the income statement, two years running: profit up and cash down is the single most useful thing you can notice about any business, and it is in every set of accounts that has it. Then the borrowings note and the maturity table: what is owed, to whom, and when it comes due. Then stop and ask the fourth question yourself, because the accounts will not: what one thing would make this business stop — a customer, a supplier, a currency, a season, a licence, a lease? Then the people, and how long they have been there.

Write three sentences. What it is: a food distributor growing fast on supermarket contracts that pay in sixty days. What the risk is: the growth is being funded by its own working capital, and the cash is going backwards while the profit rises. What you would want to know: whether the terms it gives are getting longer, and who is funding the gap. That is commercial awareness. It takes twenty minutes, and it is a better answer than any amount of reading about the company in the press, because it is yours.

Every case on this site is a composite built for teaching, and each has already been read the lender's way. Three of them, in the three sentences the method ends in.

A food manufacturer, Issue 01. What it is: a fifteen-year-old family business selling premium ready meals into supermarkets and food service, revenue up 50% in two years to US$42m. The risk: the margin has fallen, debtor days have gone from 48 to 82, inventory has more than doubled, and operating cash flow has turned negative — the growth is being paid for by the business's own cash, and now by the bank. What you would want to know: whether the new customers' terms are the reason, and whether the request to lift the facility is funding the future or catching up with the past. The file →

A precision manufacturer, Issue 04. What it is: a Hamilton sheet-metal business on three-year supply agreements, revenue up 36% to US$38m with 78% of the coming year already contracted. The risk: concentration in the agreements that drive the growth — but the margin is rising, debtor days are steady at 44, and cash flow has grown with revenue. What you would want to know: what happens at the renewal of the biggest agreement. The same request as Issue 01, and the opposite answer, because every one of the five questions came back differently. The file →

A listed retailer, Issue 07. What it is: a household name with US$240m of revenue, nine decades old, reporting profit up 9% in a soft year and proposing a bigger dividend. The risk: operating cash flow fell 31%, and three accounting footnotes — a provision released, a rebate policy changed, store refits capitalised — account for the difference between the profit and the cash. What you would want to know: what the year looks like with the three taken out, and who is funding the dividend. That is the question a lender asked, and the one the auditor had not. The file →

An assessment centre at an accounting firm usually includes a business case: a pack describing a company, some figures, and a situation — a new client, an acquisition, a financing, a problem — with a task in parts. Identify the risks. List the questions you would ask management. Make a recommendation. Sometimes present it; sometimes discuss it in a group. The pack is designed so that there is more in it than the time allows, which is the first thing to notice: the exercise is testing what you choose to read, not whether you read everything.

The five questions are the order. Who pays and did the money arrive give you the business in two minutes and usually produce the first risk. What it owes and what would stop it produce the second and third, and the questions for management are simply the things the pack did not let you answer — the terms of the biggest contract, the covenant on the loan, whether the key person has a successor. The recommendation is a decision, with a condition attached to the risk you ranked first; a recommendation that is a list of considerations is the most common way to fail the exercise while saying nothing wrong. A bank's version of the same exercise is worked in full on the assessment centre case study, and the shape of a written recommendation on how to write a credit paper.

Tell me about a company in the news. Pick one you have read in twenty minutes, not one you have read about. Say what it is, what the risk is, and what you would want to know; then stop. The panel will ask the next question, which is the one you prepared for.

What are the risks for this client? Rank them. Three, in the order a lender would — the one that stops the business first, then the one that drains the cash, then the one that changes the numbers — and say which you would ask about first. A list of eight risks is a sign you could not tell which mattered.

Why did that business fail? Nearly always one of the five: the money stopped arriving before the costs stopped, the debt came due before the cash did, one customer or supplier or licence went away, or the people running it stopped reading their own numbers. Say which, and what a reader of the accounts could have seen the year before. The site's problem loans page is that question worked from the bank's side.

The five questions are the five trays of the Groundwork: the borrower, the loan, the bank, the economy, the conduct — one-minute files, each call read against a senior banker's. For the arithmetic the panel sometimes asks for, cash conversion and cover and leverage, The Number collects every file that is a sum. Thirty days lays out a month of them, one a day. And before the interview, the placement shows where your own reading sits against a senior banker's, chapter by chapter — which is the thing the panel is about to find out.