ANALYSIS OF CREDIT INFORMATION 1. The financial statement; merchandise on hand. —When all available credit information has been col lected, the most important part of the credit depart ment's work still remains to be done, namely, to an alyze this information in order to reach an intelli gent conclusion. We shall consider here some of the chief items that appear on the financial statement forms that are now commonly used. ( See forms on pages 74-81.) Cash value of merchandise on hand is necessarily one of the important asset items. In examining this item, we should consider first of all its size in rela tion to other asset items and to annual sales. If it appears to be disproportionately large, the item be comes a subject of careful inquiry. It may indicate an overstocked condition which not only constitutes a real danger in itself but reflects unfavorably upon the business ability of the merchant.
The value of stock on hand should always be com pared with volume of annual sales, in order to obtain some idea of the number of times the stock is turned in the course of a year. If the normal turnover in the line of business under investigation is known, such comparison will show in a general way at least whether or not the business is efficiently managed.
The next thing to be noted in connection with the merchandise stock is how it has been inventoried. Is the stock all fresh and salable so that it may be dis posed of in the regular manner, without resort to spe cial sales or to unusual and expensive advertising, or does it represent, hi part, old and unsalable goods? If the stock consists in part of unfinished goods, or of goods in process of manufacture, how much of each? Is the raw material inventoried at current market prices? 2. Notes and accounts.—The custom, which at one time was popular, of giving notes for merchandise has largely gone out of use. Today, with the exception of a few lines of which the building and contracting trade and the agricultural implement trade are ex amples, the retail dealer buys his goods on open ac count, tho it is not improbable that open accounts will gradually be replaced by trade acceptances. The ap
pearance of notes receivable in a manufacturer's state ment therefore generally prompts an inquiry as to what they are for. They may represent old and un collectable debts, long carried and renewed again and again, they may be notes given by a member of the firm for money advanced him, or they may represent other items of such a character that the notes cannot be considered good paper.
Accounts receivable should, in common with mer chandise, be considered in its relation to the amount of annual sales as well as to the credit terms which obtain in the trade. If the proportion of accounts receivable to annual sales is unduly large, a lax col lection policy and lack of financial ability on the part of the management are implied.
It is also important to know how the cash value of these accounts has been estimated. Any attempt to pad the statement will almost certainly appear here.
Before deciding to grant credit on these accounts without further security, it is always well to inquire whether they, or any part of them, have been pledged for loans.
3. Cash on hand or in bank.—The necessary free dom in the financing of the business requires adequate cash on hand or in bank. A small amount of cash where the volume of sales is large, and when accounts and bills payable are correspondingly heavy, means that the dealer is courting danger. Any little flurry in the market may send him scurrying for funds while the smallness of his bank balance deprives him of the right to demand accommodation from the bank. Large and otherwise well-managed concerns have been known to place themselves in this position and to have experienced the greatest difficulty in finan cing themselves when times of stress suddenly over took them.
Unless a growing volume of sales is accompanied by a corresponding increase in the item of cash on hand or in bank, there is strong indication of inferior financial management.