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Requesting Financial Statements
By Michael C. Dennis, MBA, CBF

I was teaching a Credit Administrator Program class recently for CMA. We were discussing financial statements and their value as a tool that can be used effectively to evaluate credit risk. One of my students asked this question: "If financial statements are so useful, why don't we request them or require them from every customer that we do business with on open account terms?"

My comments included:

  1. We should do so if we can do so.

  2. Creditors in certain industries rarely if ever request financial statements from customers. If your company requires financial information and your competitors do not, you request is going to stand out --- and it could be a source of friction between the credit department and your customer[s] as well as a potential source of criticism within your company.

  3. One of the consequences of requesting financial statements is that a certain percent of privately held customers will react in unexpected and illogical ways - such as taking their business elsewhere.

  4. Privately held companies are often reluctant to provide financial statements to creditors unless those creditors are substantial amounts of open account credit and even then there is no guarantee that a customer will agree to provide this information.

  5. Certain companies only provide financial information to Dun and Bradstreet® and will direct creditors to that source of information.

  6. If your customer is publicly traded, financial information and analysis is available from a variety of sources at no cost to the creditor. There is no excuse for not having current financial information on file for a publicly traded company.

  7. If you are a secured creditor, you are in a better position to request or require updated financial statements from customers.

  8. If you are in a highly competitive industry, you have very little leverage when you request financial statements from your customer.

If you decide to request financial information, consider these tips:

  • Make your request seem completely routine

  • If you are going to request them initially, request updated statements at least once a year since conditions can change rapidly. Outdated financial statements can give the credit department a false sense of security.

  • Notify the sales department of your intention to request financial information. Customers frequently complain to their salesperson first. If the salesperson is aware ahead of time of the reason for your request, he or she is more likely to be an ally to the credit department. If caught off guard by the request, the salesperson is more likely to say something that could spur a defensive posture on the part of the customer.

  • Always request [a] a Balance Sheet, [b] an Income Statement, [c] a Cash Flow Statement and [d] Notes to the Financial Statements. Each of these four reports is essential to analyzing and understanding the customer's financial condition and challenges.

  • Be aware the personal computers [and scanner technology] make financial statement fraud far easier and far less detectable.

Returning to the original question, my final response was: We should obtain financial statements if we can, but [a] we will not always get them, and [b] sometimes customer statements will contain material misrepresentations and fraudulent information.

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