Ten Tips on Customer Financial Statement Analysis

Financial statement analysis is a tool used by creditors and investors to evaluate the current and projected financial health of a customer.  Here are some ideas to help you evaluate customer financial statements more easily: 

1. Financial analysis is an important tool but not the only tool needed to perform comprehensive credit risk evaluations on customers and applicants
2. Relying on out of date financial data is a serious but common mistake, and one that is relatively easily corrected
3. It is sometimes necessary to require rather than request customer financial information
4. Audited financial statements are clearly preferable to internally prepared statements, but audited statements are not always accurate [Hint: Enron]
5. Calculating too many ratios can make the credit decision more difficult rather than simpler
6. That said, financial ratio analysis is an extremely useful tool for quickly assessing a company’s current financial condition
7. Consider purchasing software that performs financial statement analysis if you do not have it already
8. At the very least, create an excel spreadsheet with imbedded formulas to perform ratio and trend analysis
9. When you request financial statements for the first time, be sure to ask for the prior fiscal year end statements as well as the most recent quarterly statements
10. When you request financial data, always ask for Balance Sheet, Income Statement, Statement of Cash Flows, Auditors Opinion Letter, and Notes.

© 2011 by Michael C. Dennis.  All Rights Reserved