accounting?

Question

What are some of the primary items on financial statements about which creditors usually are concerned? Which ratios would be useful to present or potential creditors?

Answer 1

Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due. They will be interested in the amt of liquid assets the co. has to enable repayments to be on schedule and in the existence of other loans and what were used as collateral. They're also interested in the trend of profits to gauge the sustainability of the business.

Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer.

Liquidity ratios are probably the most commonly used of all the business ratios. Your creditors may often be particularly interested in these because they show the ability of your business to quickly generate the cash needed to pay your bills. This information should also be highly interesting to you, since the inability to meet your short-term debts would be a problem that deserves your immediate attention.

Liquidity ratios are sometimes called working capital ratios because that, in essence, is what they measure.

The liquidity ratios are:
the current ratio
the quick ratio. Creditors generally like to see a Quick Ratio (Acid Test) of 1.0 or better.

Liquidity ratios are commonly examined by banks when they are evaluating a loan application. Once you get the loan, your lender may also require that you continue to maintain a certain minimum ratio, as part of the loan agreement. For that reason, steps to improve your liquidity ratios are sometimes necessary.

Profits are also important to creditors because profits are one source of funds for debt coverage.