Loans and marriages: a common problem.(Required reading)(lender and borrower relationship)

As a lender making a loan to a company, have you noticed how the relationship resembles courtship and marriage? When all goes well, it can be a good marriage. However, should the company show signs of financial deterioration, the relationship could become rocky. Much like in a real marriage, sometimes recognizing early signs of difficulty is the most important step in solving the real underlying issues. Without pinpointing the real root cause early on, any action p/an to correct it is likely to fail.

As a lender, you periodically receive financial reports from the company. You probably meet regularly with the company to discuss the "how are we doing" aspects of the business. What you want to look for are any early warning signs of potential trouble ahead. In that way, an action plan that addresses the real root cause of the problem can be developed to avert the future problems.

The concept of early warning signs has been applied to many aspects of life. There are warning signs that predict potential health problems, economic indicators that help forecast future fiscal well-being, and of course actions that can indicate worsening personal or family relationships.

How can you apply warning signs to evaluate and predict the future health of a business? One way is to answer 20 simple questions that will give an indication if there is trouble on the horizon for a company.

The first step is to review the company's most recent financial statement to answer the first eight questions. A simple "yes" or "no" answer will shed tremendous light on possible problems.

1. Has the company had a material sales forecast shortfall against budget for three or more months?

2. Have selling, general and administrative (operating) expenses increased as a percent of revenue or grown faster than revenue?