Financial Analysis in Credit Reviews.

On today’s episode of my reflections from the LBS MBA, I will be taking us through my learnings from the course Corporate Financial Accounting, (CFA) which has had the most significant impact on my job.

My main job description is the appraisal of commercial credits and recommendations to the bank’s management and board through the credit underwriting group. Looking back, how I survived my job for circa 14 years with an inept knowledge of CFA remains a miracle. I avoided this aspect of the credit write-up before now and always relied on other members of my team or the credit underwriting team to complete the financial reviews. The good news today is that Abimbola is fast becoming a guru in financial analysis and can now hold conversations around these effectively. 

In summary, below are the principal elements of the financial statements and their interrelatedness:

The four principal financial statements are:

 1. Statement of Financial Position, SOFP – This is commonly called the Balance Sheet. It showcases the relationship between the Asset (A), Liability (L), and Owners’ Equity (OE) at the close of a particular day, i.e. A=L+OE.

 SOFP gives a holistic financial view of the entity. Investors and financiers use information from here to decide on investing (or not) and lending to the organization (or not), respectively.

 The information from SOFP may be used to prepare the other financial statements, for example, the earned capital and contributed capital detailed under OE are the major compositions of the Statement of Changes in Equity. For the Cash Flow Statement, inventory, accounts payable, property, plants, and equipment under assets are major components of the Operating Activities and Investing Activities.

2. Statement of Profit or Loss and Other Comprehensive Income – commonly called Income Statement summarizes activities that produced revenue during the period of review. i.e. Total Revenue -Total Spending (Expenses) = Net Profit (or Loss).

 The result here (either profit or loss) is recorded in the Statement of Changes in Owners’ Equity as retained earnings or earned capital. Net Profit or loss is the starting point in preparing the Statement of Cash Flows (using the indirect method).

 3. Statement of Cash Flows –This showcases the sources of cash that were received into the entity’s books during the period and how the same was utilized. A cash flow Statement is prepared by taking into cognizance accounts from both the SOFP and the Statement of Profit or Loss. There are three parts to the Cash Flow Statements: The Operating, Investing, and Financing activities.

 Projected Cash Flow Statements for proposed facility tenor is one of the items required to analyze the viability of a loan during credit appraisals and approval processes by a bank. Our classroom discussions have improved my understanding of this particular financial statement. I now easily relate to customers’ thoughts on their cash flow projections.

 4. Statement of Changes in Owners’ Equity shows the significant transactions that affect the owners’ contributed capital, examples of which is the amount which the business owners apportion to themselves from the net incomes (or loss).

 Notes to the Financial Statements is the “Plus One”, and it is crucial as the four statements because it gives in-depth information on the four financial statements. Financial statements are usually incomplete without the Notes to the Financials.

# MEMBA 11