The Annual Update Meltdown – Michael Dennis, CBF

Annual Update Meltdown

In a previous Blog, I said that I thought it was essential to require some privately held customers to provide financial statement updates at least once a year.  Since then, I have received several calls suggesting that requesting this information from customers would upset the apple cart.  I disagree.  I believe the bigger risk to the average credit professional involves extending a significant amount of credit to a customer without having current financial statements on file.

One of my consulting clients took a significant bad debt loss.  I was asked to perform an autopsy to determine what went wrong, and what red flags might have been missed.  This was not a witch hunt.  It was an effort to figure out what went wrong and make any necessary changes.  I asked for the credit file.  I found that the most current financial statements on file were: (a) four years old and (b) unaudited internally prepared documents.  One of my key findings / recommendations to company management was to mandate updated financial statements no less frequently than annually on any customer with a credit limit in excess of $200,000.

These days, requests for annual updates from privately held companies are routine.  They may not provide the required reports in response to your first request.  However, I cannot remember the last time a customer had a meltdown when I requested updated financial information.

Michael Dennis, MBA, CBF, LCM

Well, that’s my experience.  What’s yours?

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.

4 Replies to “The Annual Update Meltdown – Michael Dennis, CBF”

  1. I agree with you Michael. At my last place of business, a customer asked for a large credit limit increase. In order to accomodate them, we required financials for the current year, as well as the last year, and an updated credit application. After we finally received everything, one of the owners disappeared with all of the money, so the company went belly up and ended up only owing us $15K instead of the $200K that they had originally requested. So, since then, we made it a policy to get financials from the customer when we were looking to raise their credit limit. You save yourself some greif and the company alot of money by taking that one step.

  2. I agree with Robin’s comment. It is critically important to request more than one year of financial statements. When you have two or more periods to compare, you can see if the customer is getting stronger, weaker, is unchanged, or is weakening in some areas but improving in others. This is criticall for making a better informed credit decision – and as you point out in your Blog this information is part of the justification for a decision to increase, to decrease or to leave the credit limit unchanged. Thank you Robin for reminding us.

  3. I work part time in my husband’s small but growing business. I think you missed the mark when you pointed out the problem with accepted unaudited internally prepared financial statements. When I request financial statements in support of extending credit, I always request audited statements. When I receive a request from a potential supplier for audited statements, I give them what I have – meaning internally prepared financial statements. We do not pay for audited statements for our company so what vendors see is what they get from us.

    This may be seen by some as slightly two-faced but I cannot provide to would be suppliers what I or we do not have.

  4. Christine,

    I take your point. Clearly, not every company has audited financial statements. That said, I think it is still important to have current financial information on file, even if the statements are internally prepared. Thank you for pointing out this oversight.

    Michael C. Dennis

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