Companies conducting self-evaluation
When a company is evaluating its own financial health to plan for growth or for a downturn, an assessment of the company’s current situation and the probability of default helps create a more complete picture.
The same is true for a company that is considering applying for a loan. Knowing your own business credit rating prepares you for potential objections on the part of a lender and can build credibility as you negotiate on rates and fees. Lower rates and fees can mean higher profits for you. When banks assess potential borrowers, they fundamentally are examining the ability of a potential borrower to repay the loan. Analyzing the potential borrower’s assets, cash flow outlook and potential pitfalls are primary objectives.
Looking at creditworthiness helps individuals recognize their firm’s financial strengths and weaknesses. Currently, many firms are still recovering from the economic recession and are facing financial uncertainty.
When addressing these problems, the first step is to identify the issue. Once you have identified key issues within your firm, the next step is to address them. Suggested ratios to analyze include:
1. Cash to Assets
2. EBITDA to Assets
3. Debt Service Coverage Ratio
4. Liabilities to Assets
5. Net Income to Sales
These ratios are a great place for small business owners to start when they are reviewing their financial health.