Financial statements are legal documents and can be used to determine the taxable amount of corporate profits. Furthermore, they are important for the management and investors/banks to better understand the sources of income and costs, to monitor the performance, and to make analyses and forecasts with regards to the profitability. They are usually reviewed and approved by independent third parties such as auditors or accountants.

These annual reports can be extensive, however, for financial underwriting only a very few key pieces information and figures play a role:

Executive summary:

Usually the first pages include an executive summary with the general opinion of the reviewing party and potentially comments from the director. Important information such as recent events which could have a significant effect on the financial position of the company, or any other going concerns would be mentioned here.

Basic details of a company:

• Name of the company (e.g. to do further research)
• Business activity (e.g. manufacturing certain goods)
• Directors (Is the applicant one of them?)
• Division of shares (What is the applicant’s share percentage?)

Profit and loss account: The profit and loss account (income statement) includes the income and expenses that the company had during a specific accounting period.

The relevant figures here are: 

• Sales / turnover = price (of product) * quantity sold
  Income derived from the main activity of the company.
• Gross profit = turnover − direct costs
  Direct costs include manufacturing, suppliers, and marketing expenses. These expenses are usually proportional to sales
• Operating profit = gross profit − indirect costs
  Indirect costs or operating expenses are not directly attributable to sales volume. These expenses do not depend on the sales volume and are to a large extent fixed.
  Examples: personnel expenses, taxes, maintenance, and other external services.
• Net profit = operating profit + non-operating income
  Non-operating income / expenses are not related to the main activity of the company. They originate from investments or special exceptional situations (e.g. expenses due to a fire). The net profit or net result: the difference between income and expenses. We recommend using net profit before tax, as it is not influenced by individual taxation and changing tax laws. The net profit is the most important figure of the financial statement.