Financial Spreading

Financial spreading is the work of taking a borrower's financial statements and entering them into a standard format so a lender can analyze them. The result is called a "spread." It lines up several years of balance sheets and income statements side by side, using the same categories every time, and then computes ratios.

Borrowers' statements come in many shapes. One company reports "cost of goods sold" while another calls it "direct costs." One owner sends a business tax return, and another sends statements prepared by an accountant. Spreading maps each line to the lender's own categories, so every borrower's numbers read the same way. ProSight Financial Association, formerly the Risk Management Association (RMA), publishes a widely used US guide for spreading consistently.

A spread usually produces measures such as:

• Revenue growth and profit margins
• Current ratio: current assets divided by current liabilities
• Debt to worth: total liabilities divided by net worth
• EBITDA: earnings before interest, taxes, depreciation and amortization
• Debt service coverage ratio (DSCR)

Why it matters for lenders

Spreading is the base of commercial underwriting. If a number is keyed wrong or put on the wrong line, every ratio built on it is wrong too. One misplaced expense can make a loan that fails policy look like it passes.

Spreading also takes a lot of time. An analyst may spend hours keying numbers from PDFs before doing any real analysis. This assembly work is where software helps most. Tools that use intelligent document processing can read statements and place values in the spread. The analyst still checks the work and makes the judgment calls, such as removing one-time gains or adding back personal expenses the owner ran through the business.

A consistent spread also helps after closing, when next year's statements arrive and need comparing line by line.

How it works in practice

A bank's credit analyst receives three years of tax returns and a recent interim statement for a landscaping company. She spreads each year into the bank's template. Year two includes a large gain from selling a truck, so she treats it as a one-time item. She also adds back depreciation, because it lowers profit but doesn't use cash.

She then spreads the owners' personal tax returns to build a global cash flow that combines business and personal income and debts.

In a spreadsheet, nobody can see where each figure came from. If a reviewer questions a number, the analyst has to dig back through the PDFs. When each value in the spread links to the page and line it came from, the reviewer can check it in seconds. The credit memo then reads its numbers straight from the spread.