What Banks are Looking for in Your Financial Statements
By Fahad Suleman, CPA
September 21, 2020
A bank usually requires a set of financial statements to calculate the amount of credit that can be provided to a business or to evaluate solvency of a business to ensure the current credit provided will be paid back to the bank. A bank analyses financial statements to review debt levels of a business and reduce any related credit risk. A bank can also request reviewed financial statements for current borrowers to ensure all of the covenants listed in the loan agreement are being met by the business. Banks usually analyze the following sections of the financial statements:
Statement of Cash flows are analyzed by the bank to ensure sufficient cash inflows are coming in the business to cater its debt obligations as required by the borrowers. Banks would like to avoid giving credit to any business which would run into liquidity issues and would have a hard time to repay its debt.
Assets held by a potential client are usually appraised by the bank to ensure the potential borrower has enough resources to sell the assets currently held by the business to repay the bank for any loans that will be advanced.
A bank will usually review the current liabilities of a potential client to ensure the client is not over-leveraged and the business will be to repay any additional loan obligations made by the bank in addition to its current liabilities.
A bank analyses the amount of revenue that a business is generating to ensure that the profitability trend is in line with its requirements. An adverse effect to profitability of a business could result in limitation to a business’s ability to repay its debts.
Expenses are usually reviewed by the bank to determine how the business is currently managing its affairs and if any excessive expenditures are being made in a certain category. It is certainly a tough area to analyze as certain expenditures made by the business would possibly be in relation to increasing the future sales and market share.
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