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Using Objective and Subjective Data Interpretation to Evaluate a Customer's Financial Health
By Michael C. Dennis, MBA, CBF

After receiving and studying a customer's financial statements, it is important for the credit manager or the credit analyst to develop a "feel" for the customer's overall financial health. To be comprehensive, the financial review should include both objective data analysis and a more subjective review of the information gathered. Objective analysis involves traditional methods of number crunching and data analysis. The subjective evaluation ends when the credit manager can answer these questions:

  • Overall, how is this customer doing financially? And

  • Does extending credit to this customer in the dollar amount requested pose an acceptable or an unacceptable risk?

The objective analysis would include a review of all of the following items:

  • The type of opinion given by the CPA

  • Any unusual accounting methods used by the customer

  • Any unusual information found in the notes to the financial statements

  • A study of any significant contingent liabilities

  • A review of the customer's loan covenants, as well as any loan covenant violations

  • Due dates or balloon payments due on long term debts

  • Financial ratios, both positive and negative

  • Trend analysis

  • Anything unusual found in comparative analysis

  • Financial profitability analysis

  • Financial leverage analysis

  • Financial liquidity analysis

  • Financial efficiency analysis

Each piece of information listed above is important in the subjective interpretation of the customer's overall financial health. In particular, it is key to interrelate and correlate the financial strengths and weaknesses of the company under review.

This analysis, combined with information about the customer's payment history, trends in the customer's industry, changes in the overall economy, and changes in demand for the customer's products and services should be used to develop an intuitive [or holistic] understanding of the opportunities and challenges facing this customer. Only after an objective analysis and subjective evaluation is completed can a credit manager make an informed decision about extending credit [or continuing to extend credit] to the customer or applicant.

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