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Financial Statement Analysis: Useless without effective write-up

Five Steps to an Effective Loan Write-up

Analysis is useless if it does not include analysis! Okay, that is pretty cryptic. Keep reading, though, and all will become clear. In preparing for a recent training on Farm Balance Sheet Analysis for an AgLending client, the Chief Credit Officer asked for a strong segment on the write-up. Why?

He said, “Too often the write-up concludes with a list of the ratios and other calculations, whether they are up or down, and then the recommendation. Without digging into the numbers myself, or asking a lot of questions, I can’t tell what the loan officer or credit analyst was considering.”

In this video, I share the five elements of a good write-up and add insights as to what goes where, and why. I call this turning numbers into insights. A bonus for you, when you can clearly communicate useful information in your loan recommendations, you stand out from the crowd.

And while this video focuses on AgLending and Farm Credit examples, the concepts apply to any business lender.

AgLending Credit Analysis Tip: The Write-up from Linda Keith on Vimeo.

My recommendation for narrative write-up

The narrative write-up needs to give enough information to the reader that they do not have to dive into the numbers themselves. It needs to augment the numbers and give the reader enough of the story behind the numbers that they can understand your recommendation.

Here are five things to include in any narrative write-up:

1. Overall Observation

This is a top-level expression of the strength or weakness of the borrower. Don’t make the reader wade through the entire narrative to get your overall impression.

AgLending example: “This operation is financially solid with low leverage and good liquidity.”

2. Appropriate Detail

You will likely include something about profitability, liquidity, solvency and leverage. Don’t include a laundry list of every ratio and whether it is up or down. Instead pick something for each of these that shows overall strength or weakness.

For example, if the current ratio is much higher than needed you may not also have to include working capital, quick ratio, trading ratio or other indicators if they are not at odds with the current ratio.

AgLending example: “Borrower exhibited and earned net worth gain of $250K and a working capital gain of $127K in the 2012 operating cycle. In 2013, earned net worth improved by $51K while working capital decreased by $215K.”

3. Detail on Anomaly

In step 2, the lender/analyst identified two possible anomalies worth more information. The profitability, while still positive, was less in the 2013 operating cycle than ti was in the 2012 operating cycle. Also, while the operation was profitable in 2013, the working capital took a tumble. Either one of these might need more explanation.

AgLending example regarding the working capital drop: “In general, this drop in liquidity would be a potential concern. In this case, the customer used $215,000 in cash as a down payment on the Keith Ranch.”

This explanation itself points out another anomaly and an important follow up question. Is it a good idea for this borrower to be using highly liquid funds for a long-term asset purchase? The answer depends on how strong the liquidity was in the first place.

And the question, what are the plans for the Keith Ranch? Does this represent an expansion of their operation? Did they make additional expenditures out of the operation because of this acquisition that might explain the drop in profitability between the two operating cycles?

Consider in your narrative how far to go in answering the questions that will naturally come to mind for the reader.

4. Restate if Needed

If the anomaly can be factored back out, like a major expense due to a natural disaster, or as in the example above, a major capital expenditure, restate their results.

Aglending example: “When this use of liquidity for a capital purchase is factored in, the borrower showed approximately a break-even in liquidity while showing a decent net worth gain.”

5. State your Conclusion

Clearly state your overall conclusion and your recommendation for the loan, including risk rating if appropriate.

AgLending example: “While 2013 did not show the same strong profits as 2012, the customer still had adequate cashflow to service all debt.

Find a model write-up

Do not assume that all write-ups in the files you review are what the Chief Credit Officer would like to see. Ask for some samples of write-ups that are done well to use as your guide. Not every loan officer or credit analyst has developed this skill set well.

More on Financial Statement Analysis?

Visit our completely self-study site at for a complete set of online modules on financial statement and tax return analysis.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.