Blog and News

Blog and News

Steve Bartoletti

First SME to benefit

Posted By: Steve Bartoletti on 10/7/2013 10:41:21 AM, 0 Comments, 31565 views

A senior account officer in the leasing department of a major bank recently contacted me: he was doing the annual review of covenants for a commercial lessee.  The company reports a negative working capital, so it is in violation of the current ratio covenant.  But the lender was uncomfortable with the conclusion that the company was "illiquid."  Searching on google, he found the Journal of Accountancy article explaining the "Missing Piece"--CPFA.  Both the new trading ratio (takes CPLTD out of the current ratio) and the corrected current ratio (adds CPFA to current assets) are greater than 1:1, confirming his expectation that the company is in fact liquid. 

The companies most affected by the flaw in the old liquidity ratios (failure to match CPLTD with CPFA) are those with substantial long term debt and large CPLTD.  If follows that the clients of leasing departments will frequently be victims of the flawed ratios. If you work in a leasing department, or make long term loans, think twice before accusing your clients of being illiquid. 

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