Secrets of Bonding146: Financial Statement Sniff Test

Here is a account of my business and accounting courses in college:




I was an Education Major (teaching), so I didn’t get anything on banking statements “FSs”. If I started as a aggressiveness band underwriting trainee, I accomplished that I had no idea what a Balance Sheet was – but I learned.

If your aboriginal acknowledgment if you attending a FS is “Duh,” we will fix that appropriate now. Accumulate reading! This will be a appearance from 30,000 feet. Big picture.

To be complete, every banking account must include at the minimum:

1) Balance Sheet

2) Profit and Loss Statement

The Balance Sheet

This certificate is a one-day breeze attempt of the funds in the aggregation (Assets) and who owns them (Liabilities). The assets and liabilities are according “balance” because every dollar in the aggregation is apparent from two credibility of view: the Asset ancillary and who owns it, the Liability side.

The Balance Sheet has three important locations we can assay initially. Let’s assay them based on their functionality.

Current Assets: This band account is a subtotal begin abreast the average of the Asset column. It represents those assets readily convertible to cash aural the advancing budgetary year (such as Accounts Receivable).

Current Liabilities: Begin abreast the average of the Liabilities column, these are debts to be paid in the advancing budgetary year (such as Accounts Payable).

Total Stockholders Equity, aka Net Worth: Usually the endure annex abreast the end of the Liabilities column. This is the company’s Net Worth that would abide if they shut down and asleep everything.

The Profit and Loss Statement

This is a actual arbitrary of all the money taken in (Sales aka Revenues) and money spent (Expenses) during the above-mentioned period, usually one year. At the basal of the cavalcade is the Net Profit, which is the money the aggregation “made” for the year afterwards paying all the accompanying bills and taxes.

Now that you can aces out a brace of cardinal numbers on any FS, what shall we do with them?

Calculate Working Capital

This is a primary admeasurement of banking backbone acclimated by all analysts, including sureties, banks and added acclaim grantors. It is begin by adding the Current Liabilities from the Current Assets. It is an indicator of accepted banknote breeze in the advancing year.

The Sniff Test

Here is a quick, simplified assay to use if because a accurate bid or achievement bond. The appraisal is fabricated based on the accepted contract (not bond) amount. This is an burning adumbration of the capability of the affairs in attention to the accessible project.

Part One – The Working Capital ambition bulk is 15% of the arrangement amount. For example, if the arrangement bulk is $1,000,000, sureties achievement to see Working Capital of at atomic $150,000.

Part Two – The Net Worth ambition bulk is 20% of the arrangement bulk or about $200,000 in our example.

Certainly there is added to aggressiveness underwriting than this simple analysis. However, by application this method, you can get a quick abstraction of whether the banking account calmly supports the bond, or may be a stretch. If your assay reveals abrogating numbers, which are apparent in departure on banking reports, that’s acutely a bad sign.

Also accumulate in mind, applicants that do not accommodated these belief may still authorize for bonds based on added factors – and the about-face is aswell true. Aggressiveness underwriting takes many factors into consideration. In this commodity we are alms a actual simplified adaptation of the action although it is accurate as a quick review. This action will accredit you to accomplish a fast banking evaluation, and chronicle it to the accessible aggressiveness exposure.


This commodity doesn’t accomplish you a band underwriter, but now if you get a new FS instead of “Duh!” you can say “Let me assay this!”

Running a quick assay additional the Sniff Test will announce the likelihood of accepting aggressiveness support. You abstruse a lot in three minutes, but if you accept a band that fails the Sniff Test, that’s area our ability and bazaar admission appear in. Call us!