Fig. 1. Customer's Financial Statement
So important is this phase of the question that some of the larger banks have adopted the plan of assigning requests for loans in different businesses to different officers. One man will investigate real estate securities, one, applications from board of trade houses, another handles applications from packing houses, others look after the steel, building, jobbing, and manufacturing enterprises. Each man is a specialist, making a special study of conditions in the business to which he is assigned.
In making an analysis of a statement, each item must be taken up separately and considered with respect to its relationship to other items, and its bearing on the statement as a whole.
Cash on Hand. The cash on hand should be consistent with the needs of the business, and, if listed separately, the cash in office should never be a large sum. There is seldom any good reason why cash should not be deposited daily. The banker will find it necessary to carefully scrutinize the amount in bank, particularly if the borrower claims to deposit in no other bank.
Merchandise. This item is always a somewhat uncertain quantity; often an estimate pure and simple, and the debtor is unlikely to make his estimate too low. In the absence of provable figures, it is necessary for the credit man to apply his knowledge of the business. Is the stock larger than should be required? Is it too low to enable the debtor to keep pace with his competitors? Or, if a manufacturing business, how much is raw material and how much finished goods?
One of the important factors in making an analysis of this item is a knowledge of the accounting methods of the debtor. Does he keep stock records, or if not, is his stock well cared for and stored in a manner to permit of a reasonably accurate estimate? On the latter point, reports of the observation of salesmen, referred to later on, have an important bearing.
Bills Receivable. On the statement form shown, this item is divided as to notes, secured and unsecured, not due and past due. To state that the amount of bills receivable is so much is one thing, to state the amount not due, is quite another. Any considerable amount of unsecured and past due paper indicates lax methods in the debtor's own credit department.
Accounts Receivable. This item is divided as to accounts less than 60 days past due and accounts more than 60 days past due. These items require the same close scrutiny as bills receivable.
The two items—bills and accounts receivable—should bear a reasonably constant ratio to the amount of sales. Any unusual increase in the percentage of book debts to sales calls for careful scrutiny, and leads to one of three conclusions: that trade conditions are bad, that the credit department has been lax, or that the amount is overstated.