- Home
- Bankruptcy and Bankruptcy Code
- Business Entities
- Departmental Operations
- Credit Practices
- Legal
- Risk Analysis
- Understanding Accounts Receivable Costs
- Accounts Receivable Forecasting
- Informing Customers of their Credit Limits
- Authorization for Bank to Release Credit Information
- Authorizing Release of Credit Information
- Bank Loans and Bank Credit
- Expediting Bank Reference Requests
- Understanding Banking Relationships
- Bounced Checks; Collecting on Bounced Checks, NSF Checks
- Business Credit; Trade Credit; Open Account Credit Terms
- The Five Cs of Credit Analysis
- Check Acceptance
- Check Kiting
- Classification of Risk; Customer Risk Score
- COD Terms; Slow Pay; High Risk; Risk Mitigation;
- Code of Ethics
- Confidentiality Agreement
- Consumer Credit Granting
- Commercial Credit Application; Necessary Components
- Credit Approval Process
- Credit Associations
- Credit Decision-Making
- Offering Open Account Terms; Credit Extension
- Customer Credit File; Credit File
- Credit Granting Authority
- Credit History and Strategy
- Credit Insurance; Trade Credit Insurance; Export Credit Insurance
- Credit Line or Credit Limit
- Credit Policy Checklist
- Credit References
- Credit Reporting Agencies
- Credit Risk Environment
- Credit Risk Management
- Credit Role/Strategy
- Credit Decision Making: Is it Art or Science?
- Customer Purchase Orders, Errors on POs and their Impact on Collections
- Customer Retention
- Grace Periods and Cash Discounts
- Direct and Indirect Credit Investigations
- Unearned Discounts; Unearned Cash Discounts; Cash Discounts
- Enterprise Resource Planning
- Ethics for the Credit Manager
- Evaluating Financial Health
- Exchange of Credit Information
- Extended Dating Terms
- Credit File Documentation
- Fraud Signs and Prevention
- History of Credit
- Cargo Insurance
- Insurance Brokers and Credit Insurance
- Internet as a Source of Credit Information
- Late Charges
- Minimum First Order Without Credit Investigation
- New Account Checklist
- Non-Disclosure Agreement
- Open Account Sales; Open Account Terms; Extension of Credit on Open Account Terms
- Order Approval; Order Hold; Credit Reviews; Pending Order Review
- Order Controls / Order Approval
- Pro Forma Invoices
- Requesting Financial Information from Customers
- Restrictive Endorsements
- Returned Checks
- Return Merchandise Authorizations
- Root Cause Analysis of Past Due Balances
- Safeguarding Accounts
- Security Agreements; Secured Debts
- Seller's Invoice
- Terms and Conditions
- Terms of Sale
- Terms of Sale: Examples
- Types of Credit: Consumer Credit; Bank Credit; Commercial Credit; B2B; Business to Business
- Written Credit Policy Manual
- Handling Post Audit Claims More Effectively; Post Audit Claims
- Do's and Don'ts of Business to Business Debt Collection, Debt Collection Practices
- Bad Debt Reserves
- Advantages and Disadvantages of Purchasing Credit Insurance
- A Letter of Introduction
- Addressing Chronic Slow Pay Customers
- More about Cash Forecasting
- Streamlining Order Processing
- Collection Practices
- Financial Analysis
- Financing Methods
- International Credit
- Laws and Regulations
- Payment Methods
- Performance Measures
- Security Instruments
- Career Management, and Job Change
- Credit Website Tools
- Upcoming Educational Events
- Credit and Collections Tools and Tips
- Tips on Creating Better Emails
- Generating Effective Credit Correspondence
- Exporting
- Accounting
Evaluating Financial Health
After receiving and studying a customer's financial statements, it is important for the credit manager or the credit analyst to develop an overall sense of the customer's overall financial health. To be comprehensive, the financial review should include both objective data analysis and a more subjective review of the information gathered. Objective analysis involves traditional methods of number crunching and data analysis. The subjective evaluation ends when the credit manager can answer these questions:
- Overall, how is this customer doing financially? and
- Does extending credit to this customer in the dollar amount requested pose an acceptable or an unacceptable risk?
The objective analysis would include a review of all of the following items:
- The type of opinion given by the CPA,
- Any unusual accounting methods used by the customer,
- Any unusual information found in the notes to the financial statements,
- A study of any significant contingent liabilities,
- A review of the customer's loan covenants, as well as any loan covenant violations,
- Due dates or balloon payments due on long term debts,
- Financial ratios, both positive and negative,
- Trend analysis,
- Anything unusual found in comparative analysis,
- Financial profitability analysis,
- Financial leverage analysis,
- Financial liquidity analysis,
- Financial efficiency analysis
Each piece of information listed above is important in the subjective interpretation of the customer's overall financial health. In particular, it is key to interrelate and correlate the financial strengths and weaknesses of the company under review.
This analysis, combined with information about the customer's payment history, trends in the customer's industry, changes in the overall economy, and changes in demand for the customer's products and services should be used to develop an intuitive [or holistic] understanding of the opportunities and challenges facing this customer. Only after an objective analysis and subjective evaluation is completed can a credit manager make an informed decision about extending credit [or continuing to extend credit] to the customer or applicant.
Copyrighy 2009 by Michael C. Dennis, author of "1001 Collection Tools and Tips."