Financial spreading is the process of transferring data from a borrower’s statements to the bank’s spreadsheet for financial analysis. It involves inserting a borrower’s tax documents and financial statements from years into automated financial spreading software, helping analysts identify trends and determine their financial condition. Simply put, financial spreading aims to analyze information from a borrower’s existing financial statements and predict future statements. Here is a comprehensive guideline for the financial spreading process.
Identify the Outcome
The primary purpose of financial spreading is to present granular financial data to banks. The information helps banks make strategic decisions and support credit appraisals, rating analysis, and investment advisory. Before beginning the financial spreading process, one must identify the outcome they expect from the process. These include the following:
- Income statements
- Cash flow statements
- Balanced ratio between the bank and the borrower
- Account report
- Net worth rapprochement
While reports may give more information, banks often set these benchmarks as a standard to select borrowers. They use these ratios to evaluate the risk in sanctioning loans and liquidity in the case of repayment failure.
Select the Right Spreading Method
Although financial spreading helps mitigate risk, the implementation method may vary from bank to bank. Many banks use manual and semi-manual processes, which are error-prone, time-consuming, and resource-intensive. By extension, the technique becomes less efficient and often leads to wrong analysis. Therefore, this marks the need for automated financial spreading with intelligent tools and processes.
As far as banking analysis is concerned, it is mostly about financial spreading with varying methods. Although each spreading process is unique, a few elements always remain common. For example, the spreadsheet is one of the most popular mediums for entering financial information. Its organization may demand expertise, but the grid design of automated software programs makes value updating efficient and faster.
Some banks may use balance sheets for data entry since their characteristics are similar to income statements. Moreover, balance sheets help maintain a database of liabilities and assets, making spreading a seamless task.
Check the Details to Include in the Spreading
Financial statements contain several data points to describe a borrower’s financials. Corporate borrowers regularly release these statements containing information like their earnings, liabilities, assets, operating budget, expenses, etc. Accountants and financial planners use these statements to anticipate product launches, business expansion, future projects, and other strategic decisions. On the contrary, banks use these statements for risk assessment before loan processing. Depending on the purpose, check the details to include in the spreading and create accordingly.
While financial spreading is a simple activity of presenting borrowers’ financials to the bank, it is crucial to ensure regulatory compliance at each step. Here are a few points to check:
- Long-term liabilities should not appear as existing liabilities
- Current assets should not appear as non-existing assets
- Investments should not lack the liquidity potential
- Non-current assets should not include restricted existing assets
Automated financial spreading systems help spread the financial statements while ensuring compliance with the relevant regulations. Based on these statements, the bank can determine a company’s income and assets and lend according to their financial patterns. An adequately designed financial statement spreading shows a borrower’s potential, which is a crucial parameter for conducting credit analysis.