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Summarizing a Customer's Financial Condition
After studying a customer's financial statements, it is important for the credit manager or the credit analyst to try understand and to summarize the customer's financial condition. The goal of this process is to get a mental picture of the customer's overall financial condition, including its strengths and weaknesses. The credit manager's review of the subject company's financial data needs to be comprehensive. The credit professional's analysis should include all of the following elements:
- The type of opinion given by the CPA,
- Any unusual accounting methods used by the customer,
- Any unusual information found in the Explanatory 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 is potentially important. The analysis should include both positive and negative factors, and these positives and negatives must be juxtaposed against each other to develop a clearer understanding of the company's strengths, weaknesses, opportunities, and challenges. The final step when reviewing a customer or applicant's financial statements involves making a recommendation relating to whether or not to extend credit to the customer or applicant.
© 2011. Michael C. Dennis. All Rights Reserved.