A lender needs data to make an informed decision. When you apply for a home loan, car loan, personal loan or credit card, the lender collects documents to make sure that it is a risk-free loan. The lender gets a copy of your credit report to check your credit history and credit score. Depending on the information in your credit report, the lender may reject or approve your loan. The lender wants to know about your incomes, expenses and loans to ensure that you can pay the loan back.
The same goes for commercial lending. A lender goes through the financial statements of the borrower. Every company publishes financial data documents on a monthly, quarterly, biannual or annual basis. Financial statements is the term used for these data documents. Financial statements include the company’s:
- Assets and liabilities
- Expenses
- Operational budget
- Earnings
These documents are beneficial for accountants, senior executives and financial planners. They can use these data documents to make decisions related to launches, expansions and planning. Banks use financial spreading software for spreading financial statements. In spreading financial statements, a lender moves the financial statements of the borrower to its financial analysis spreadsheet program. There can be both advantages and disadvantages of financial statements.
Advantages
Pattern Detection
The lender needs to know how much the company earns in annual sales. Sales may be up or down. Banks analyze sales figures over the years. This is done to identify a pattern. The company’s financial planner also attempts to identify a pattern to support decision making. For example, when a new product is launched, there might be a pattern of increased sales. After the product has been on the market for a year, its sales may drop. The pattern shows potential and sales patterns. This information is very useful for both lenders and the company itself. The loan is less risky if the pattern shows increasing sales.
Budget Outline
Financial statements show the budget of the company. This is important information a lender needs. The company’s budget reveals how much the company will spend on product launches, expanding business, sales and marketing. The bank needs to know if the company has sufficient funds to make payments. The company also needs this information for accurate planning and decision making. It uses this information to make sure that it does not spend more than what it has.
Disadvantages
Market Patterns
The data in financial statements is based on the market. So, depending on the market, this data may change quickly. The figures in the previous financial statement may increase or decrease. If the company sold 2 million products in the current year, it may not be able to achieve the same success next year.
At-One-Time Analysis
A financial statement provides information at one single time. The bank needs to put extra effort as a financial statement does not tell how well the company is doing. A single financial statement is not enough.
Spreading financial statements can be done manually as well. However, using financial spreading software ensures accuracy.
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