Updated: Dec 2, 2019
Financials are an essential component of a complete credit decision.
The quality and 'presented form' of financials impact the quality of your credit decisions in two ways. First, the information provided, has a direct correlation on interpretation and completeness of the analysis. Secondly, financials can range from 'independently audited' to 'highlights provided verbally'. What you received must be ranked and that rant determines the financial information's standing in the analysis. For instance, audited financials hold more weight than
un-audited financials, and significantly more weight than verbally provided financial highlights.
A key aspect of any request for Customer financials is gaining an ongoing relationship with the financial professionals. Your Company seeks commitment from financial managers to provide annual numbers and be available to answer questions that may arise from our reviews. They don’t want misconceptions from our review of their numbers.
What to Require from Customer
Your Company should always require 'audited financials'. Financials, so designated, in the cover letter by an independent accounting firm, have that firm's attestation to accuracy. The accounting firm is attesting, under penalty, that not only are the financials completed to GAAP standards, and are accurate, but that they tested the underlying accounting through an independent audit. Your Company should communicate in the credit application and terms and conditions of sales, preconditions for doing business.
What is the Strategy to Obtain Financial Information
A Note Upfront: Do not make guarantees or assertions to Customers, that providing financials will result in open terms or a significant credit limit. You do not want to be committed, only to find poor credit quality.
You want financial information, in hand, that allows you to make a sound and confident credit decision, and meet the needs of the Customer. I make a point to share my goals in obtaining financials, by emphasizing how it builds and supports the relationship between companies.
You Want Audited Financials
Be consistent in your request for audited financial. Determine the projected credit limit in the short and medium terms. Ask the question: Must we have audited numbers or do we have enough 'other information' to accept less?
Seek Sales support in providing a a financial leader's contact information. Personally, I like to email a finance professional, to introduce myself and give options for contact. I advised that I am "seeking audited financials or a annual report on your company, so that we can set a limit that will meet your company's current and future needs".
Provide options to set the Customer at ease, on providing audited financials. Assure the Customer, that you understand confidentiality laws, how you will store the financials, and who will have access. You can agree to a Non-disclosure Agreement or Confidentiality Agreement. Ask them if it is okay to provide your NDA. Using your Company's NDA saves the time required to have legal review the Customer's, especially if changes are needed.
Private company financials take 2-4 months to be published. If your request is in that time frame, ask for the prior year financials and any interim numbers, until last year's are available. If you are at year end, ask for the last annual report and 6 month interim numbers.
These numbers were checked by the accounting firm, but the underlying accounting was not checked. The cover letter with identify the financials as reviewed. The accounting firm has no liability in the accuracy of the general ledger.
As with partial financials, these are generated by the Customer, or accounting software.
Other Options to Financials
Comfort Letter- This is a letter highlighting numbers from financial statements that both parties agreed to for disclosure. The Customer attests to, as accurate.
Proforma Financials- Start up businesses or businesses in transition, may provide financials for an upcoming period based on forecasts.
Signed questionnaire- The form may require 20-30 numbers from the financial statements, attested to by the Customer.
Customer Visit for disclosure of Financials- This may result in carrying away a copy, viewing with ability to take notes, or viewing without notes.
The notes that accompany financials are very important and should be part of any ask. They can shed light on loans, loan covenant compliance, loan maturities, business structure or ownership.
Available Training by Consult
Contact me about training your staff in the basics of financial review for credit or to trail my own financial analysis model and scorecard.