Which Financial Statements do Lenders Care the Most About? (2024)

FAQs

Which Financial Statements do Lenders Care the Most About? ›

The cash flow statement in conjunction with the balance sheet allow for a lender to analyze the working capital efficiency of a company. If a company has large amounts of accounts receivable and a low cash balance, yet is highly profitable, the company may have working capital problems.

Statement of Cash Flows

The cash flow statement focuses solely on the inflow and outflow of cash, which is a good barometer for lenders and investors to use for evaluating how your business is operating.

Types of Financial Statements: Income Statement. Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.

Statement #1: The income statement

The income statement is read from top to bottom, starting with revenues, sometimes called the "top line." Expenses and costs are subtracted, followed by taxes. The end result is the company's net income—or profit—before paying any dividends.

The cash flow statement shows the company's cash inflows and outflows, including its ability to generate cash from operations. By analyzing financial statements, lenders can determine the borrower's debt-to-income ratio, debt service coverage ratio, and other important financial metrics.

The income statement reports a company's revenues and expenses, including a company's profit figure called net income. The cash flow statement (CFS) tracks how a company uses its cash to pay its debt obligations and fund its operating expenses and investments.

Net profit margin is one of the most important ratios which a lender takes into consideration prior to approving a loan application. Before a lender can determine if you are able to pay your outstanding debts, you must have a sufficient amount of money left after your expenses are paid in full.

Primary users of the financial statements are considered existing and potential investors, creditors, and lenders. Primary users obtain financial statement information and allow them to understand the overall health of the company such as its net cash flow status etc.

While the cash flow statement is considered the least important of the three financial statements, investors find the cash flow statement to be the most transparent. That's why they rely on it more than any other financial statement when making investment decisions.

The income statement provides valuable insights into a company's financial performance, indicating its ability to generate profit, manage expenses, and operate efficiently over a specific period. Investors, analysts, and stakeholders use this statement to assess the company's profitability and financial health.

Is the balance sheet or income statement more important? ›

The Bottom Line

Investors scrutinize the balance sheet for indications of the effectiveness of management in utilizing debt and assets to generate revenue that gets carried over to the income statement. The income statement shows the financial health of a company and whether or not a company is profitable.

The two most important aspects of profitability are income and expenses. By subtracting expenses from income, you can measure your business's profitability.

To stay on top of your company's financial performance, it's important to use both the P&L and the balance sheet. What's the relevant time frame? If you want to know how your company is doing right now, then use the balance sheet. If you want to see how your company has performed over the past year, use the P&L.

What Do Mortgage Loan Officers Look for in Bank Statements? Overall, they're looking to see how healthy your finances are. To do this, they look at all of your financial accounts, balance information, account holders, interest information, and account transfers.

Creditors use financial information to predict whether companies can generate enough cash in the future to cover debt payments. Future cash flows are at the heart of a company's true value, which is of interest to both investors and creditors.

Lending ratios exist to conduct credit and financial analysis of potential borrowers before loan origination. They include the debt-to-income ratio, the housing expense ratio, and the loan-to-value ratio.

Essentially, a lender will want to use your balance sheet to see that you have enough assets to cover your business's operating expenses and pay back your loan on time and in full.

Lenders gain a deeper insight into the applicant's financial health, which helps them improve their credit assessment and collections. Improved customer relations, better portfolio management, and the ability to offer risk-based pricing to customers are additional benefits of analysing financial statements.

Lenders may want to see bank statements because transaction summaries give a fuller picture of financial profiles and because bank statements can verify what people say in loan applications. A lender can identify general conduct through spending habits, debt obligations, bills and regular income.

The Income Statement

This statement tracks the money that is coming into the business and also the money that is going out of the business.