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The 5 Most Important Uses of ACRA Financial Statements in Credit Risk Management



Credit Risk

Financial data is of crucial importance in the world of business, not least in the field of credit risk management. Such data tells companies the very important story of their counterparts' business growth, development, and stability not only at the moment, but also over time, and it carries a very high weightage as it informs arguably at least 3 of the 5 Cs of a standard credit risk assessment model. As such, financial data is a key source of insight into whether or not another company is a suitable and safe candidate for business collaboration.

In Singapore, official financial statements filed with ACRA (the Accounting and Corporate Regulatory Authority) provide the needed financial insight into the performance of companies and their credit risk levels.

Financial filings are required by regulation for all Singapore incorporated companies except sole proprietorships, partnerships, limited liability partnerships, and limited partnerships, though any company can also choose to file a financial statement if they wish.

In reality, this rule means that only somewhat more than 70,000 of Singapore's nearly 300,000 registered companies file financial statements, and hence it cannot be depended on as a source of financial information for all companies. Nevertheless, for those that have filings in ACRA, the information is incredibly useful.

Depending on what is being sought, this data can be used in various ways to drive the credit risk assessment process.

Here are the 5 most important ways that ACRA financial data is used in the credit risk assessment process.

1. Assessing L/A Ratio

The most common use of financial data is of course to illuminate various aspects of the target company's financial performance. One of the first things looked at when assessing whether or not to extend credit is the company's own liabilities.

A company with a high liability/asset ratio (L/A ratio) is one that owes more than it owns. This would be considered a credit risk due to uncertainty about its ability to honour further debts. Thanks to the ACRA financial statements that most companies in Singapore are required to file, you can gain this information by simply diving into their balance sheets, and, by examining annual statements over multiple accounting periods, you can also identify whether this situation is improving or worsening.

Here’s a detailed example on how an ACRA financial statement generally looks like.

2. Assessing Financial Health

ACRA financial statements can also help you identify whether a company is fundamentally making money or not, through its profit and loss (P&L) statements. It hardly needs saying that a company that is making consistent losses could constitute a credit risk due to the possibility of delayed or non-payment, or even closure.

3. Assessing Financial Stability

The cash flow statements (CFS) included as part of a company's ACRA financial statements can given you an idea of how good a company's cash flow is, and can be taken as an indicator of the company's stability and financial solvency--both important considerations when extending trade credit on a regular basis.

4. Supplementing Non-Financial Data

In addition to the purely financial analysis of a company, financial data from ACRA financial statements can also be used in conjunction with non-financial company info such as company profile data and people profile data to paint a more complete picture of a company's financial prospects and creditworthiness.

For example, your evaluation of a company's financial performance may be tempered by the fact that the company's leadership has recently undergone a reshuffle, or that it has been bought over by a new owner with no experience in the industry, for example.

5. Securing Business through Transparency

While ACRA financial statements are largely used by an evaluating company to assess the filing company, they can also be used by the filing company themselves (specifically those not already required by law to file financial information with ACRA) to help secure business faster and easier.

The filing of financial information, even if not a complete statement, provides some measure of transparency that creates grounds for trust and a more accurate assessment. Companies need to know who they are granting credit to. Financial information provides that assurance by eliminating doubt and reducing the risk of the unknown through concrete data and insights, and signalling that as partners, they would be as open and transparent as they have been with their data.

Conversely, in the case of smaller companies for which little data might be otherwise available, a lack of financial data could cost businesses valuable deals due to the evaluator erring on the side of caution and choosing not to grant credit, especially if the latter is based overseas with no way of assessing or validating the company in person.

In short, making your financial data accessible through a filing could contribute to a company's ability to secure business more quickly and easily.

Financial Data-Gathering in Singapore Made Easy

While gathering financial data in some countries is difficult, Singapore has made it so easy, with a single database (ACRA) containing all the information you need in easily accessible, fully digitised XBRL and PDF formats.

Furthermore, Singapore also has specialised business data providers like CRIF Bizinsights, which not only can gather the raw data for you, saving time and money, but also offer higher-order insights through in multiple report formats through the combination not only of ACRA financial statements, but also credit reports, profile data, and other sources, not only in Singapore but also worldwide.

With such ease in filing and accessing financial data in Singapore, enhancing credit risk management, and securing business, have never been so easy. Get filing. Get searching!