Don’t compare apples to oranges – Evaluate borrowers accurately by normalizing financial statements
Abstract: Borrowers’ accounting practices can vary widely. An accounting tool called “normalizing” can help adjust income statements and balance sheets to compensate for companies’ different accounting methods. Failing to normalize financial statements may result in faulty lending decisions. This article uses some examples to illustrate how normalizing works and the difference it can make in helping a lender who is evaluating a borrower accurately compare its practices to those of a competitor or to industry benchmarks.