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Decoding Financial Statements: Understanding People, Relationships, and Results

Gain insights into how bankers evaluate financial statements, focusing on balance sheets, income statements, and cash flows. Learn about the significance of current assets and liabilities, leverage ratios, profitability margins, and cash flow management. Understand the key components that bankers consider, such as unusual accounts, officer loans, and collateral. Explore the importance of accounting policies, revenue recognition, and business projections in securing bank approval. Develop a comprehensive view of your company's bankability through discussions on ownership, management, competition, and future plans. Establish a strong banking relationship by addressing presentation issues, evaluating collateral, and identifying potential red flags. Get guidance on navigating the current banking environment and setting up effective cash management arrangements.

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Decoding Financial Statements: Understanding People, Relationships, and Results

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  1. How Bankers Look at Your Financial Statements People. Relationships. Results.

  2. Balance sheet Income statement Statement of cash flows Notes Which Statements? People. Relationships. Results.

  3. Accountant’s concerns Banker’s concerns Where’s Waldo? Trends Story Sources of repayment Accountant …. Banker People. Relationships. Results.

  4. Current Assets / Current Liabilities Assets excluded Accounts Receivable Inventory (COGS, A/P) Intangibles Unusual accounts Balance Sheet - Assets People. Relationships. Results.

  5. Balance Sheet Assets People. Relationships. Results.

  6. Accounts payable (inventory) Officer loans/debt Leverage = Liabilities/Tangible Net Worth Unusual accounts Balance Sheet - Liabilities People. Relationships. Results.

  7. Balance Sheet Liabilities, Net Worth

  8. Sales - COGS = Gross Profits - Selling, General and Administrative Expenses = Operating Income + Other Income - Other Expenses = Net Income Income Statement People. Relationships. Results.

  9. Trends Margins Profitability Officer compensation Legal expenses Bad debt expense Unusual expenses Income Statement People. Relationships. Results.

  10. People. Relationships. Results.

  11. Statement of Cash Flows • Indirect Method (SFAS No. 95) • Direct Method (SFAS No. 95) • Lender’s Direct Method People. Relationships. Results.

  12. UCA Cash Flow - Lender’s Direct Method • Business components • Order of priority of claims on cash flow People. Relationships. Results.

  13. Trends Working Capital/Liquidity A/R turn/days Inventory turn/days A/P turn/days Leverage Operating, net margins DSC Ratios People. Relationships. Results.

  14. Business activity Accounting Policies Revenue recognition Property and equipment – depreciation Cost of sales Debt: Notes payable (leases) Expense detail Litigation Notes People. Relationships. Results.

  15. Business plan/projections Accounts receivable and payable agings Company tax returns Asset listings Personal statement Personal tax returns (complete) Additional information People. Relationships. Results.

  16. Cash flow, DSC Collateral Guarantor support Red flags Five C’s Is your company bankable? People. Relationships. Results.

  17. History of company Ownership Division of duties Management Marketing/sales Competition Differentiation/niche Suppliers Challenges Banker conversation • Labor supply • Key employees • Facilities/space needs • Equipment needs • Banking history • Plans for the future People. Relationships. Results.

  18. Presentation issues Current issues - appraisals LTV DSC Current banking environment Cash management arrangements Establish a relationship now Other/Misc People. Relationships. Results.

  19. Leslie Mittanck, CPAVice PresidentCommercial Banking Officer1st Pacific Bank8889 Rio San Diego Drive, Suite 101San Diego, CA 92108(858) 875-2090lmittanck@1stpacbank.com

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