CHAPTER 4: CREDIT MANAGEMENT
Income Statement. This is also called a Profit & Loss Statement, Statement of Earnings, or Statement of Operations. It is a listing of sources and monetary amounts of a company’s revenues and expenses, gains and losses, for a particular period (e.g., quarter or year). A company’s profitability is calculated from revenues and gains minus expenses and losses. Statements usually cover 12 months of operation, with interim statements monthly and quarterly. Cash Flow Statement Auditor’s Report, with explanatory notes.
For a consumer: Tax returns—formal documentation of income (also B2B); Bank statements.
A point to remember is that all these documents are a reflection of the past and must be used in conjunction with other research to make a solid decision on a credit limit. This should be done not only when reviewing a new customer, but periodically to keep the customer file current once a line of credit is granted.
The key aspects of financial statement analysis with the use of standard ratios are these: Stability (income to support debt/expenses and several months reserve)
Degree of leverage/indebtedness (debt-to-equity ratio) Degree of liquidity (ability to acquire cash quickly) Capacity to pay Trends
Key ratios and formulas used to analyze statements (B2B and B2C) include the following:
Quick ratio (also known as the “acid test ratio”). This ratio compares the total amount of cash + marketable securities + accounts receivable to the amount of current liabilities. Current ratio (company’s ability to pay off short-term liabilities with its current assets) Other business ratios: { Turnover ratio (the frequency of inventory turnover) { Cash Conversion Cycle = (days inventory outstanding + days sales outstanding) - days payable outstanding, i.e.: Days inventory outstanding (DIO) = inventory/(cost of sales/365) Days sales outstanding (DSO) = trade receivables/(credit sales/365) Days payable outstanding (DPO) = trade accounts payable/(cost of sales/365)
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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