Showing posts with label Financial statements and lenders. Show all posts
Showing posts with label Financial statements and lenders. Show all posts

Sunday 31 May 2009

Financial statements and the lenders

Financial statements and lenders

The lenders to the company may be trade creditors, banks, debenture holders, etc. They may stipulate different repayment periods and duration of the borrowing may be short, medium or long term.

Consequently, the information required by each category of lenders vary owing to their terms and conditions of the borrowings.

Short-term creditors need information about the creditworthiness of a company. They will need to know the company's liquidity, short-term solvency, profitability and asset utilization. Relevant ratios are the current ratios, acid test ratio, debtor payment period, creditors payment period, inventory turnover and gross profit margin.

Medium-term and long-term lenders are interested in the solvency, gearing, asset utilization, interest cover, cash flow, and cash flow projection. Some medium and long-term loans are secured on the assets of a company, in which case the realisable value (estimated net selling price) will be a useful indication of financial security.

Financial statements are historical statements. Important information such as forecast cash flow and ovrdraft facilities are not provided in published financial statements while current asset composition can alter tremendously over a short period of time.

One should be wary of "window dressing", which is manipulating the composition of current assets and liabilities on the balance sheet date to achieve a satisfactory current ratio or even a liquidity ratio.