Financial Reports and Lending Decisions Essay

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There are several things I would want to know before lending money to anybody. One of these is the audited financial statements for the past three years. The reason I want to see the audited financial statements is because the auditing process ensures the reliability and truthfulness of the statements. Statements that are unaudited are simply not worth the paper they are printed on – the auditing process will uncover irregularities, and I'm going to need that in order to lend money. Furthermore, the auditor's report puts a stamp of approval – knowing that a professional auditor has signed off on the financial statements is an important part of the process of ensuring that I am making my decision to lend or not lend based on sound information about the financial condition of the company (Crawford, 2018).



On the surface, the information that Jason provided seems fine enough. I would not make the decision based on these numbers alone, but in theory a current ratio of 3.1 points to a company that is solvent. That asset turnover is improving is also a positive sign, in terms of the cash conversion cycle. If net income and EPS are up, that is also good, though as a creditor I'm much more concerned with free cash flow and whether my debt is subordinated – but it is definitely a good sign that these numbers are going in the right direction. However, there are definitely some other things I would need to know.



One is that the financial statements will tell me the raw numbers.

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It is not actually relevant that net income is up if Jason's financials are based on a lemonade stand and he's borrowing to buy diamond-mining equipment. We have to know if the company can specifically handle borrowing the dollar figure that it is asking for, and that is not something that these particular numbers can tell us. This is what is known in banking as capacity.



The second thing I need to know is the collateral, or capital, that the business has. In other words, I need to be able to secure this loan somehow. It might be able to secure it against whatever equipment Jason is buying, but maybe I cannot. It is important to know, if I am lending to a small or medium-sized business, what assets that business has against which I can secure my debt investment (Kiisel, 2013).



Hayes (2018) notes that there are several other ratios that can help determine the financial health of the company. Three ratios that would also be important are the cash ratio, the accounts receivable turnover and the inventory turnover. The cash ratio is important because it highlights how much cash the company has to meet its obligations – the current ratio can be distorted by high values for inventory that won't be sold, or accounts receivable that are unlikely to….....

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References

Crawford, C. (2018). The importance of audited financial statements of a business firm. Your Business Retrieved March 15, 2017 from https://yourbusiness.azcentral.com/importance-audited-financial-statements-business-firm-17757.html

Hayes, A. (2018). Ratio analysis: Using financial ratios. Investopedia. Retrieved March 15, 2017 from https://www.investopedia.com/university/ratio-analysis/using-ratios.asp

Kiisel, T. (2013) The five Cs of small business lending. Forbes. Retrieved March 15, 2018 from https://www.forbes.com/sites/tykiisel/2013/11/05/the-five-cs-of-small-business-lending/#719ed0c9555a
 

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