As a general rule, each item in the statement should bear the proper ratio to annual sales. Merchandise should be in the proportion of one to five or one to three of the amount of annual sales. Accounts re ceivable should be about one-sixth of the sales, where the terms are sixty days; in a department store they would be about from one-tenth to one-twelfth of the sales; and in a woolen business, one-third of the sales on four months' time. The ratios between sales and the various accounts referred to, differ in different businesses. Where purchases are made on sixty days, accounts and bills payable should equal about one-sixth of the sales; where they are made on six months' terms, about one-third to one-half of the sales.
If the statement is taken at the season when the borrower's assets are in the most liquid condition, the amount of quick assets should be about twice the amount of current liabilities. A smaller proportion would indicate that the business is in danger of over expansion or embarrassment during the heavy season.
In a manufacturing business the total volume of sales should be about one to three times the amount of capital; in a jobbing business, four to five times the capital; and in a raw product or brokerage business, from five to twenty times the capital.
A good manufacturer's statement should show a cash balance of about twenty per cent on the notes discounted at the concern's own bank, in order to maintain good bank credit.
These are only a few of the credit analysis rules known to all credit men. They are not inflexible but they serve as guides in the study of a particular sit uation. Experience and knowledge of all the circum stances in a given case are essential.
The importance of the statement of affairs as a means of obtaining credit is fully discussed in the Modern Business Text on "Credit and the Credit Man." Whether a business concern is seeking credit from a dealer or from a bank, the same principles hold true. Forms of statement are analyzed at some length in the Text referred to, and some of those which are there discussed are addressed to banks. The brief summary given here and the two statements introduced will serve to refresh the memory of the reader, but any extended analysis of these statements would be superfluous.
8. Information from bank's records of the borrower's account with the bank furnish much information of which the average business man is not aware. For example, the average balance indicates the general trend of the depositor's business. Then,
again, much informatiOn may be derived from a record kept by the receiving teller of the items de posited by the borrower over a given length of time, the names of the makers of the checks, and the places where they are payable. As a rule, when a borrower applies for a loan he gives as reference a list of picked concerns, which he has paid most promptly, but omits those who will not speak favorably of him. The credit man can find out the names of others to whom he may write for further information, however, by running over the paid vouchers. The overdraft record also enters into the analysis of a depositor's account.
The analysis of a borrower's affairs along the lines indicated gives the credit man a clear insight into the condition of the borrower. When these analyses are compared year with year, still further information is disclosed. Banks that have efficient credit depart ments call for statements at frequent intervals and make direct comparisons of them. The value of such comparative credit records is apparent.
9. Dun's and a rule, banks call upon Dun's and Bradstreet's for special reports and make careful note of the ratings given to the bor rower by these concerns. A loan would hardly be granted on the strength of an agency rating or re port. Nevertheless, such reports reveal certain facts which are of value to the credit man. A man whose business is in good condition will do himself no harm by treating the representatives of credit agents courteously and giving the information they wish. Their report, if favorable, will be particularly valuable to him when his credit is questioned at some distance from the community in which he lives.
10. Trade relations.—The credit department also investigates the borrower's trade relations, as implied above. If a prospective borrower has done business with men in the city where the bank is located, the bank seeks information from the credit men connected with these concerns. Of course, the credit man of the bank always holds himself ready to reciprocate the favor when he is in a position to do so. When neces sary, he secures credit information from out-of-town concerns by writing to them. The replies may be in definite because of a fear on the part of the concerns that their names will be used, even tho they write in strict confidence. The wording of the letters is usu ally very guarded, but the capable credit man is able to read between the lines.