Credit Management
What a balance sheet should mean to a commercial credit professional By Robert Burns*
Robert Burns
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The analysis of financial statements from a commercial credit professional’s point of view is quite different from that of a lending or large institution. Banks and other lenders who in most cases have access to detailed explanations and books and records of the company or firm. Also, bankers have an added advantage of knowledge of the day to day financial dealings of their customers through their banking operations. Most astute bankers are usually the first to identify trouble within their client’s operations. The credit professional on the other hand must rely on conclusions drawn from within their industry, their customer’s monthly trading with them and the customer’s and financial statements relying on the balance sheet and revenue statement ratios. Most published comment is regarding the interpretation of financial statements is directed to the large corporation. Usual accounting training is given on “how to read a Balance Sheet” or “Balance Sheets – what do they reveal” are all directed to these large listed corporations who have prepared audited publicly available financial statements. However careful review enables the same concepts of review of the smaller enterprise. In this article we restrict our
CREDIT MANAGEMENT IN AUSTRALIA • May 2020
discussion to those businesses who are maintaining records and thereby regularly preparing their financial accounts. Discussions with insolvency professionals often reveal a high percentage of their appointments have no suitable books or records. Often the records are prepared sporadically inline with BAS and ATO annual accounts, regulations however, the new one touch payroll superannuation requirements may lead to better record keeping. The credit professional therefore must examine financial statements in varying degrees of completion and detail. However even the most sophisticated of these statements will be worthless if the numbers cannot be interpreted. Financial statements are not geared to the particular purpose of any one user. The same statement is prepared for the Australian Tax Office, creditors, banker, shareholders, proprietors and other interested parties. We hear discussion about several sets of books: 1. ATO – low profit. 2. Absent shareholders – low profit and low assets. 3. Creditors – reasonable profit and coverage of debts by assets. 4. Proprietors, directors – True copy. Many small business financial
