Financial statements provide an objective overview of the company's financial health, reducing reliance on self-reported data or personal bias. This article provides two financial statement request letter templates.
Article Topics
Why Request Financial Statements
Aligning Risk Appetite with Requesting Financial Statements
Requesting Financial Statement Sample Letter
Requesting Financial Statements Benefits
Financial statements play an important role in analyzing the current level and trend of profitability, leverage, liquidity. Financial ratios derive from spreading financial statements and can be used for industry specific financial ratio benchmarking.
Financial statement analysis help answer two important risk management questions.
Who are your high-risk customers?
Are you being compensated appropriately to achieve an expected return?
There are three financial statements that present a company's current and past financial performance. Each statement brings its own unique value to credit analysis.
Balance Sheet: Evaluates what a company owns (assets), what is owes (liabilities), and the ownership value (equity).
Income Statement: States revenue, expenses, and profit or loss of a company during a specific period, typically annually or quarterly.
Cash Flow Statement: Provides a detailed description of the cash inflow and outflow over a specific period.
As financial risk is an inherent aspect of all business activities, it is suggested for your company to establish a specific threshold for when to request financial statements, such as dollar amount, geography, or payment terms.
Once this threshold is reached, and before finalizing any agreements, the analyst should request and begin to spread the financial statements. The analyst is then tasked with completing the credit assessment to make a recommendation on whether to absorb, mitigate, or avoid the risks altogether.
Aligning Risk Appetite With Requesting Financial Statements
Risk appetite refers to the level of risk your business is willing to accept in pursuit of its goals. It is a broad based statements that guides the organization's approach towards taking on, managing, and mitigating risk.
This risk appetite is company specific and determined by various factors such as the company's operational objectives, risk capacity (the total amount of risk your organization can handle without putting its survival at stake), regulatory environment, market conditions, financial goals.
Defining your company's risk appetite helps align risk-taking activities to an overall strategy, ensuring that all decisions are made within an acceptable risk-reward framework.
One of those decisions to make is when to request financial statements. As each company has their own risk appetite, the triggers for requesting financial statements will also vary.
Setting a dollar amount threshold is one clear and straightforward method that can be used to determine when to request financial statements. For example, if the loan amount or credit limit exceeds $150,000, financial statements will be requested.
Once the dollar threshold is determined, analyze your current portfolio to understand the number of counterparties that meet these criteria.
To support the dollar threshold, the 80/20 rule can be tested.
80/20 Rule
The 80/20 rule, also known as the Pareto Principle, is a concept in business that suggests 80% of outcomes result from 20% of all causes for any given event.
Named after the Italian economist Vilfredo Pareto, who observed that roughly 80% of the land in Italy was owned by 20% of the population, the principle has broad application across different fields.
In business context, it can be applied to areas like:
Sales: Often, around 80% of a company's revenue comes from 20% of its clients or products.
Project Management: The last 20% of the project can take up to 80% of the time, due to unforeseen complexities or issues.
Debt Collection: For businesses with past due accounts receivable, they might find that 20% of the debtors are responsible for 80% of their outstanding debt.
In credit risk, a common application of the principle is that 80% of your company's credit risk is likely to come from 20% of your customers.
For example, if your company has 800 customers:
Sort the customer list by largest to smallest sales dollars, credit limit, or expected credit loss.
The 20% rule places the cutoff at number 160, or 800 x 20% = 160 customers. .
At a minimum, your team would be requesting financial statements for those 160 customers.
It is important to note that the percentages of 80 and 20 are not fixed. It is an experiment that businesses can use to focus the most value-added tasks.
Financial Statement Request Sample Letters
When it comes to making informed credit decisions, nothing quite matches reviewing a company's financial statements. Certainly not third-party payment behavior. It is through financial statements that analysts can evaluate profitability, access capacity to service debt, and compare the customers ratios to financial ratio benchmarks by industry.
A well crafted financial statement request letter saves time and ensures requests are consistent and professional. It also helps in standardizing the information you receive, making the subsequent analysis more streamlined and efficient.
Timing of Request: Understand it will take time for the customer to gather the documents. The request should be sent 60-90 days prior to the credit review date.
Defining the Documents: Be specific about the financial documents your require. Typically, these would include the income statement, the balance sheet, and cash flow statements.
Politeness and Clarity: Your request is not a demand. Always maintain a courteous tone. Clearly state why you need the documents and reassure the recipient that the information will be confidential and uses solely for credit assessment purposes.
Setting a Deadline: Including a reasonable deadline is key. This expresses the urgency of your request and sets expectations, helping expedite the process.
Here are two request letters on how to request financial statements:
Template 1
Dear [Counterparty Name],
I hope this message finds you well.
I am writing to request the most recent financial statements as part of our ongoing credit assessment process. Specifically, we are interested in your income statement, balance sheet, and cash flow statement.
These documents will help us conduct a comprehensive review of your credit status in line with our financial policies and risk management guidelines. We assure you that any information provided will be used exclusively for this purpose and will be treaded with the highest level of confidentiality.
Can you kindly provide these documents by [insert date]?
Should you have any questions or concerns, please let me know. Thank you in advance for your prompt attention to this request.
Best Regards,
[Your Name]
[Your Title]
[Your Contact Information]
Template 2
Dear [Counterparty Name],
I am writing to request your most recent financial statements for the purpose of conduction a routine credit assessment. Our company regularly performs these assessments to ensure a strong, healthy relationship with our partners. We assure you this process will be handled with confidentiality.
Specifically, we would appreciate it if you could provide us with your:
Income Statement
Balance Sheet
Cash Flow Statement
We kindly as you to send us the requested information by [insert date, typically two to three weeks from the date of the email].
Please feel free to contact us should you have any questions or need further clarification about this request.
Thank you for your prompt attention to this request.
Best regards,
[Your Name]
[Your Title]
[Your Contact Information]
Final Thoughts
Credit analysts should be focused on higher risk, higher dollar, strategic counterparties. It is recommended to identify and set appropriate thresholds for requesting financial statements to optimize time and resources. Please use one of the financial statement request letters listed above when reaching out to a customer.
Schedule a demo to see how CreditKernel's credit rating model criteria identifies credit risk, estimates the probability of default, and communicates key information to support business decisions.
Frequently Asked Questions
1. Is it normal to send a financial statement request letter?
Yes, it is a common business practice to request financial statements to
perform due diligence on sizeable and strategic customers. The "size" and
"strategy" is depended on your company's risk appetite.
2. What is the concept of risk appetite?
Risk appetite in refers to the level of risk a business is willing to
accept in pursuit of it goals.
3. Are audited financial statements required?
Audited statements are preferred as they have been reviewed by an
independent third party for accuracy. However, depending on the credit
amount and risk, unaudited statements might be accepted.