Spreading financial statements is a process through which a bank transfers information from a borrower’s financial statements and feeds it into the bank’s financial analysis spreadsheet program. This is helpful for the bank as it can extract meaningful information from those statements.

These reports may include financial ratios, common size balance sheet, common size income statement, cash flow, and reconciliation of net worth. Banks benchmark the financial sheets of similar kinds of companies, work out the ratios, and decide to give a loan after determining how much of the business can be liquidated if the need arises.

These spreads may/may not conform to GAAP

This can happen when:

  • Non-current assets may include current assets that are restricted
  • Assets that don’t have the potential to convert to cash again
  • Liabilities for the long term are spread as current liabilities

Quality of the financial statements is not that relevant

The financial statements of the company can be confined to the GAAP, or have any other deviation. The bank spread will always have its principles for its spread and analysis which will be more conservative than GAAP.

The spreading financial statements are a bit conservative as the banks have a huge role to play in the economy.


Financial spreading practices

  1. Prepaid expenses: Prepaid expenses are reflected as current assets in GAAP but the bank spread terms it as a non-current asset as it will never convert to cash. This will however be shown as cash that was prepaid but will not help in any lending for the borrower. In the case of ongoing liquidation, the prepaid amount would not help in reducing the debt.
  2. The amount that is to be received within 12 months, that is notes receivable is considered as a non-current asset by the bank, this is because they assume that the amount can be defaulted and not be paid in that year alone. And if the amount will be paid on time is many times discretionary at best.

The roadblocks in spreading financial statements software analysis

When working on financial ratios and comparisons, your spreads may show better results than the financial statements software analysis. If this happens, you need to revisit your spreads and look for gaps. As for getting a loan, you should adhere to the bank’s standards. Too much deviation is not good.

In some cases, the bank in question could be too cautious. They are ways to structure around what the banks perceive as risk, assuming that the finances involved are healthy and the parties involved are disciplined with their finances.

How does the credit analysis process work?

  1. Obtaining reliable information about standards to support transaction volume and the risk associated.
  2. Easily discernible and accessible, and uniformly spread through spreading financial statements software.
  3. Assessing the results relative to similar companies.
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Through this analysis, banks find out the position of the current borrower? Will it be frugal to give out a loan on these credentials? These kinds of questions are answered.


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