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:
We should do so if we can do so.
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.
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.
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.
Certain companies only provide financial information to Dun
and Bradstreet® and will direct creditors to that source
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.
If you are a secured creditor, you are in a better position
to request or require updated financial statements from customers.
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
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Outdated financial statements can give the credit department a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.