Scrutinizingwhether to give a loan to a startup company can be challenginghowever, as the one to approve it, it is important to look at variousfactors. To begin with, one should evaluate a business plan as itdetails most information about an entity. It is from that documentthat a bank can determine the feasibility of the business(Kimmel, Weygandt & Kieso, 2016).Secondly, one should examine the competitive analysis of theorganization and try to understand why the owners believe it willsurvive.
Thirdly,a loaner should examine the contingency plans one should look whatthe company has planned in case it faces an issue like lawsuit amongother concerns. Furthermore, a representative of a bank should alsolook at the projections of the balance sheet, cash flows, startup andoperational cost. Moreover, the bank’s representative should alsocheck personal financial statements with details of recent credithistory, a list of personal assets and current debt in addition toother sources of income for startup phase (Kimmelet al., 2016).
Thebank’s representative also determines the character of theborrower. On the other hand, when determining whether to give a loanto a well-established organization, a representative of a bank wouldlook at the actual financial statements such as profit and loss,balance sheets and cash flows of the business, previous dealings withthe banks, the reputation of the organization, and how it is tradingin the market (Kimmelet al., 2016).
Inan organization, it becomes crucial to prepare financial ratios. Theanalysis of these ratios is important as it is used to measureprofitability by using gross profit, net profit, and expenses amongothers (Kimmelet al., 2016).Furthermore, it can be used to determine operational efficiency bycalculating activity ratios.
Similarly,they are used to measure the financial position by calculatingsolvency and liquidity ratios. In addition, ratios are used tofacilitate comparative analysis in an organization. This is done bycomparing performance between current and previous years. Moreover,they are used for budgeting and forecasting as meaningful decisionsabout the organization`s future can be drawn from them. Ratioanalysis is very important to external users such as investors,customers, and creditors (Kimmelet al., 2016).
Forinstance, the ratios are used to help creditors determine the creditworthiness of the organization. Moreover, they help investors toanalyze the feasibility of the company in which they wish to puttheir money. Investors will want to know how much to expect when theycommit their financial resources. Also, the ratios can be importantto customers who want to know whether the organization will be ableto keep a steady supply of good and services in a long term period(Weygandt, Kimmel & Kieso, 2015).
Thequality of earning is a term used to denote the amount of income thatis attributable to lower or higher cost instead of artificial profitscreated by some anomalies such as inflation. The main determinant ofearning quality might include inflation, capital incentives, andaudit hours, the leadership of the organization, firms financialreporting, performance, size, and investment of the organization(Kimmelet al., 2016).
Forinstance, for firms that have poor performance, it has been notedthat they engage in earnings management to control their performance.Moreover, “a firm’s size is positively associated with earningquality because of fixed costs that are associated with maintainingadequate internal control procedures over financial reporting,”(Kimmelet al., 2015).Governance of an organization is correlated with earnings as theycontrol a manager’s ability and opportunity to manage earning.
Onthe other hand, the manager’s compensation and share ownership havebeen predicted to affect the earning quality as they provide amotivation for earning management. Auditors are determinant ofquality earnings because their duty is concerned with preventingunintentional and intentional misstatement (Kimmelet al., 2015).
Kimmel, P. D.,Weygandt, J. J., & Kieso, D. E. (2016).Financialaccounting: tools for business decision making(8th ed.).
Weygandt, J. J.,Kimmel, P. D., & Kieso, D. E. (2015).Financial& managerial accounting.