Stock statement analysis

Why banks read stock statements month by month

A cash credit borrower submits a stock statement every month: stock, creditors and debtors. The bank uses it to work out drawing power, the amount the borrower can actually draw. But a single statement says little. Six months side by side show whether the numbers are consistent with the business, and whether the account is being run within its security.

Questions a credit manager asks of a run of statements:

• Was the limit ever used above drawing power?
• Do sales, purchases and stock move together sensibly, or does stock jump just when drawing power is needed?
• Are collections coming in, or are debtors only growing?
• Are creditors being paid, or stretched?
• Is the gross margin stable from month to month?

How to use this calculator

1. Enter each month's sales, purchases, closing stock, creditors, debtors up to 90 days, debtors over 90 days and the limit used.
2. Enter the margin the sanction applies to drawing power.
3. Add or remove months with the buttons below the table.

The formulas

• Drawing power = (Stock − Creditors + Debtors up to 90 days) × (1 − margin)
• Cost of goods sold = Opening stock + Purchases − Closing stock; gross margin = (Sales − Cost) ÷ Sales
• Collections = Opening debtors + Sales − Closing debtors
• Payments = Opening creditors + Purchases − Closing creditors
• Holding days = Balance ÷ Annualised sales × 365

Worked example

In the example loaded, utilisation was above drawing power in 2 of the 6 months (September and October). Annualised sales are ₹1,242 lakh, the average gross margin is about 11.8%, and debtors average 84 days of sales. Two months of excess drawing in six is the kind of pattern a bank will question at the next review.

To learn how drawing power works on its own, use the drawing power calculator.

Frequently asked questions

Why exclude debtors over 90 days? Older receivables are less likely to be collected, so most sanctions don't allow drawing power on them. The age limit and margins depend on the sanction terms.

What if the stock statement doesn't match the books? Banks compare stock statements with the audited balance sheet and GST returns, and a stock audit may be called. Large gaps are a red flag.