Magazine article Business Credit

Forensic Financial Analysis

Magazine article Business Credit

Forensic Financial Analysis

Article excerpt

The future of the credit department has taken on a new dimension because of the sophistication of new computer systems to manage accounts receivable and credit management. But, even with these new tools, the credit department faces a higher level of risk due to downsizing, recapitalization, undercapitalization, leverage buyouts, Chapter 11 bankruptcies and fraud. We also live in a time when domestic and international economic turmoil affects not only Wall Street, but also the financial condition of many corporations worldwide. Because of the adverse conditions impacting daily business decisions, it is important that credit and financial decision-making be brought to a higher world class level. The credit department must be equipped with the most sophisticated financial analysis software that measures financial risk against industry standards. The financial analyst must be able to evaluate the financial statements and footnotes at a level "below the surface."

This new age of sophisticated software and computer systems should assist the credit department in minimizing risk and bad debt write-off. Unfortunately, we live in an age where financial and economic risks have dramatically increased. The cash flow and equity position of many corporations have reflected dramatic volatility, due to instability in the marketplace, competition and international economic conditions. Sustaining competitive advantages, for many companies, can add to corporate cash flow problems. Unfortunately, dealing with factors that contribute to a higher level of risk requires analysts and credit management teams with diverse levels of knowledge. This knowledge is usually in the field of financial and economic risk analysis. Analyzing at that level requires forensic financial analysis. This methodology is vital when analyzing high-risk customers and vital suppliers and minimizing the potential for financial fraud. The following reflects the process for raising your credit decision making to a "world-class level."

The Process of Financial Analysis

Financial statements should be required from all customers with A/R exposure greater than $50,000. In addition, contact customers in order to receive annual reports and/or interim financial statistics. The annual receipt of both interim and annual financial statements is especially recommended for high-risk customers and critical suppliers. Dun & Bradstreet also can be used as a secondary resource for obtaining subjective and financial information. Finally, Internet financial information sites are one other source for pulling financial information for public and private corporations.

The use of bank reference information is also important when assessing the financial condition and credibility of corporations. The following questions are critical to beginning the process:

What is the length of the borrowing relationship?

How many years of experience?

High or low credit?

What types of loans?

What is the rate of financing?

What is the current balance?

Is financing secure?

Have loan covenants been amended?

Is the company in compliance with loan covenants?

Investigative Phase

When visiting a company to obtain financial information and/or clarification of the trending statistics, be sure to have an agenda. Include clarification of financial statement, ratio and trending statistic discrepancies. Your primary objective is to evaluate the negative conditions and ask questions to verify authenticity and validity. Some of the critical financial questions should be asked more than one time to verify statistical accuracy. Once clarifications regarding the negative conditions have been obtained, you can then determine the level of impact from a short and long-term condition perspective. During your tour, ask to see finished inventory and question their system for monitoring inventory and/or accounts receivable. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.