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Best practices for financial spreading

Published on October 3, 2022 by Meha Thakur

Reviewing and analysing financial data are key steps in credit analysis. Most companies provide this data from bookkeeping, while others hire accountants to compile sophisticated statements and conduct audits. Regardless of the quality of these statements, decision makers need to be able to quickly identify risks and take decisive action. This is where financial spreading is beneficial.

Spreading refers to the process by which an analyst transfers information from a borrower’s financial statements to a bank’s financial analysis spreadsheet program. The analyst follows a standardised presentation when transferring the data so it can be presented uniformly, making the credit analysis and risk assessment process smoother and more efficient.

Best practices for financial spreading

Spreading methods vary from institution to institution. Although each method is unique, some elements of the spreading process are common.

  • Uniformity with original financials: The purpose of spreading financial data is not to significantly alter the data, but to reformat it in a more useful Hence, the financial spreads should be coordinated with the original documents.

  • General items: To create an accurate spread, some general points need to be checked and the spread adjusted, as necessary. The following are some of these general points:

  • The currency in which the financials have been provided; when dealing with foreign currencies, use the exchange rate

  • Are the figures provided actuals? Are they in thousands or millions?

  • Are the financial statements standalone or consolidated?

  • Auditor’s report and type of statements provided – are they audited, reviewed, complied, company-prepared, tax returns or projections?

  • Are there financial reclassifications or restatements in the available comparable statements? A restatement could be due to an inaccuracy in a previous statement, relating to an acquisition, divestiture or other corporate action that alters the final reporting.

  • Division of current and non-current assets and tangible and intangible assets: One of the main objectives of spreading is to differentiate current liabilities and assets from non-current ones and tangibles from intangible assets, to provide a true picture of the company’s liquidity and long-term viability.

  • Impact on ratios and cashflow: Each line item in a spreadsheet is linked to a ratio computation, and balance sheet and income statement line items are also used to calculate cashflow. Therefore, it is important to consider carefully which account a specific line item belongs to and how it will affect output ratios and the different activities of cashflow such as operating, investing or financing.

  • Reconciling income statements with the balance sheet: Income statement reconciliation with the balance sheet is of utmost importance. If there is an increase or decrease in the company's net profit, the same change should be reflected in the business's net worth. In the event net worth cannot be reconciled with the income statement, a reasonable explanation should be sought; otherwise, a red flag could be raised. 

  • Uniformity and consistency in methodology: To ensure quality financial spreading, it is imperative to follow a consistent methodology and set of A set of guidelines streamlines the spreading process, resulting in faster turnaround and increased productivity.

In a nutshell, financial spreading is conducted to standardise how an organisation follows and reads financial statements. It may involve reclassifying or rearranging accounts so that businesses can be more easily assessed, but spreading should always be in line with the source material. Net worth must always be reconciled with the income statement, or a reasonable explanation provided for not being able to do so. Consistency and uniformity indicate a good spread.

How Acuity Knowledge Partners can help

We support global and regional commercial banks and investment banks with the consistent treatment of line items based on industry best practices and agreed-on methodology documents. Our automated BEAT Aura extraction and spreading tool is an AI-based spreading solution that helps research analysts (MBAs, chartered accountants and CFAs) automatically retrieve information from company filings and populate relevant data points in client-approved MS Excel models and templates. Following the automated spreading process, our highly experienced domain experts ensure the accuracy of the output

Key benefits of our services include the following:

  • 24-hour turnaround for rush spreads

  • 40-50% reduction in costs

  • 99% accuracy

  • Flexible staffing.


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About the Author

Meha Thakur is a part of the Commercial Lending team. She has 5+ years of experience in Commercial Lending operations. Prior to joining acuity, she worked as a financial analyst for NatWest Group. She has a master’s degree and Bachelor’s degree in Commerce (Hons) from Lovely Professional University.

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