Uses of Financial Statements to Creditors

• Financial statements provide vast amounts of useful information regarding a business, such as its cash position, debt level, sales performance and expenses. A business' creditors uses its financial statements in various ways to review and assess the business. By ensuring that its financial statements are accurate, a business can provide useful information to help expedite credit decisions. Each financial statement provides a creditor with a different set of data with which to make a decision about extending credit or to evaluate the credit-worthiness of an existing customer.

Balance Sheet

• The balance sheet is a financial statement that provides information about the assets, liabilities and equity of a business. Creditors can use the balance sheet to glean information about the state of a company's cash position, receivables management, inventory management and its debt levels. The balance sheet is a snapshot of the business at a certain place in time.

  If the balance sheet was prepared Oct. 31, 2010, for example, it will list the cash, receivables, inventories, liabilities and equity of the business as of that date. By comparing balance sheets from different periods, the creditor can gain insight to the efficiency at which the company is operating, as well as whether the company is increasing debt or decreasing in assets, both of which are signals of financial distress.

Income Statement

• The income statement, also known as a profit and loss statement, provides creditors with vital profitability information about a company. The income statement will provide the sales performance and the expenses incurred during a period, or range of periods. Creditors use this information to ascertain how profitable a business has been in a historical period.

  One drawback about using the income statement to base credit extension decisions is the issue that the income statement only provides historical information and does not expound on the future. The balance sheet complements the income statement in this regard, as it can show creditors what problems may be on the business' horizon in relation to its cash position, receivables, inventories or debt levels.

Statement of Cash Flows

• The statement of cash flows is perhaps the most important financial statement analyzed by creditors. This statement details the cash activity of the business, which is essential in determining the ability of the business to pay its short-term debt. This statement helps creditors determine the true liquidity of a company. Since most business-to-business corporations sell to customers on credit, the accounting period in which the sale is made is rarely the period in which the cash is received.

  The statement of cash flows simplifies a creditor's research, as it shows the true cash position of a company. While a company may be profitable on an income statement, they may be cash-poor, due to poor collections on its receivables. The relationship of the balance sheet to statement of cash flows in this case is obvious: As the receivables balance increases, the statement of cash flows shows more cash leaving the business than coming in.