The Right Tool For The Job – Michael Dennis, CBF

The Right Tool?

During a recent seminar, I was asked if customer financial statements are the right tool for establishing credit limits for new accounts and for monitoring or changing the credit limits for active customers.  It was a great question and one that I have thought a lot about.  In my opinion, financial statements are a useful tool in evaluating a customer or applicant’s creditworthiness, but financial analysis is not the only tool that can and should be used to make these decisions.

It is essential to differentiate between audited and unaudited financial statements.  In most creditor companies, 20% of customers account for 80% of total sales.  Ideally, these larger customers can provide audited financial statements.  Basing credit decisions on unaudited financial data is fraught with risk, including the risk that the unaudited data includes either (a) subtle manipulations intended to make the customer or applicant appear more creditworthy or (b) outright inaccurate and fraudulent financial information intended to convince creditors to extend credit to a company that would otherwise not qualify for open account terms.  The problem for creditors is that it is almost impossible to determine the accuracy of unaudited statements… but many creditor companies have only a handful of customers that have audited financial statements.

So, going back to the original question about the use of financial statements, I believe each of the following statements is true:

  • Unaudited statements may not be worth the paper they are printed on
  • Audited statements are not always completely accurate, but they are the best that creditors can get from customers and applicants
  • No credit review is complete without evaluating financial statements
  • Creditors should routinely request financial statements from customers and applicants
  • Out of date financial information can be more dangerous than having no statements at all.  Why?  Since customers’ financial conditions always change over time, relying on outdated financial information may result in a decision to extend more credit than the customer deserves
Michael Dennis, MBA, CBF, LCM

What are your thoughts? Are customer financial statements the right tool for the job?

Michael Dennis’ Covering Credit Commentary. Michael’s website is

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

One Reply to “The Right Tool For The Job – Michael Dennis, CBF”

  1. Aloha Dennis,

    Thank you for all that you’ve done, & continue to do, for the Credit & Collections community!

    In response to the question, I’ve learned that financial statement analysis is just part of the credit investigation & analysis process,

    Each of ‘the c’s of credit’ are importance pieces of the credit analysis (character, capital, collateral, capacity & conditions).

    Once the credit invesitgation & analysis is done, an overall picture of creditworthyness can be established .. which leads to determine how much risk the creditor is willing to take on the account. This, then, leads to establishing a credit limit.

    Thank you for allowing those within the Credit & Collections community to read & respond to your articles.

    Most respectfully,

    Grady Wells, CBA, CBF, CCE & LCM

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