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Back to basics: Cash flow, good underwriting and spotting problems early

In a recent article in the RMA Journal, Gerald Dent, EVP and CCO of Zions Bancorporation, explained the shift to fundamentals this way:

“The 1989-90 economic downturn changed the way we lend money, … from collateral-based lending to cash-flow analysis for determining the borrower’s ability to pay on a long-term basis. … A lot of the success of banks since that time has been based on this change.

“As to how to weather the economic environment, the best thing that bankers can do is keep their relationship officers focused on good underwriting as well as monitoring to avoid surprises.

“It is a well-proven principle that the sooner you recognize a problem, work with the obligor to create a workout plan, and implement it, you minimize your pain and the potential for loss and maximize the obligor’s chances for survival and success.

As I read this it seems to me that the ability to estimate cash flow comes back to the forefront whenever credit crunches and the economy turns down. Oh, that would be now! (Maybe that is why my company is getting more calls for our tax return analysis training.)

Here is my short list for some of the basics when it comes to cashflow:

  • Request sufficient information from the borrowers including financial statements and tax returns
  • Respectfully recognize the good track record of your bank’s long-time business borrowers, clearly understand the required documentation and firmly request it.
  • Brush up on the skills, or get them in the first place, to pull recurring cash flow from tax returns and financial statements…and while you are at it, recognize signs of stress and strain that can be found in those documents.
  • Remember that not every business is struggling and that making assumptions can cause you to overlook loan opportunities

And one more basic:

If your business borrower is a good credit risk, other banker’s may be courting them. Consider steps you can take now to strengthen the relationship with your best customers.

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.