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NACM Survey: Accounting Ratios Valuable, but Financial Information Scarce

NACM's April monthly survey found that 61.2% of credit professionals use accounting ratios in their analysis of a customer's creditworthiness. A surprisingly sizable 37.2% don't, and the remaining 1.4% weren't sure. But regardless of how they answered, respondents noted that the use of accounting ratios was tied to the availability of financial statements from their customers.

"I use them when we get a customers' financials, we just seldom get financials," said one participant.

Repeatedly in the survey comments, respondents noted that accounting ratios could only be calculated with proper financial information, which was scarce almost across the board, and nonexistent in some industries. "In our industry, I don't believe that it's common to see financial statements and, thus, ratios are not commonly used," said one respondent. "We receive financials on less than 10% of our customers," said another. "When we do get them, we fully analyze including ratios and other factors to compute a risk of default."

Some participants noted that this was driven by their customer base, whether it was comprised of exceedingly large or exceedingly small companies. "My company does not analyze credit risk. It mainly caters to corporate giants," said one respondent, while another noted that their "customer base is small enough to have direct knowledge of each customer," rendering financial information and accounting ratios less important.

Credit professionals dealing with diverse customer bases had "yes-and-no" answers, noting that they use ratios when possible. "While most of our customers are 'mom and pops' without much financial information that doesn't come out of a shoebox, for the more sophisticated operations, ratios are a very helpful snapshot," said one participant.

All respondents that did make use of accounting ratios extolled their virtues and noted how valuable they were as a quick measure of creditworthiness. "Calculating just a few ratios on the financial statements can quickly provide guidance on the financial strength of the customer and their expected capacity to pay," said one participant. "While these ratios are not in and of themselves guarantees of prompt payment, it does provide a great deal of insight as to the strength of the organization and how well they manage their own cash flow," said another.

NACM's monthly survey for May is now live and asks about what factors are most important when choosing a collections or legal services provider. Click here to participate today.

- Jacob Barron, CICP, NACM staff writer