Debtor’s Financials—An Unsecured Creditor’s “Wish List” for 2005
by Douglas G. Fox, CCE
Upon a bankruptcy filing, the debtor is required to provide its schedules of assets and liabilities (“schedules”) and statement of financial affairs (“SOFAs”).
In reviewing a large debtor company’s (“debtor”) schedules and SOFAs, it is always disappointing not to find a statement of cash flows. The statement of cash flows is one of the primary financial statements required under U.S. Generally Accepted Accounting Principles (“GAAP”). However, there appears to be no requirement that the debtor provide this statement in its reporting.
Why is this significant? The statement of cash flows is one of the most important financial statements used by most (if not all) financial analysts to interpret the financial health of the debtor. This statement memorializes the cash flows of the debtor in terms of net cash provided (used) for: (a) operating activities, (b) investing activities and (c) financing activities. By analyzing this statement, the financial analyst can interpret where the money came from, and where the money went. This is of paramount importance to unsecured creditors who may wish to continue to sell to the debtor on open terms (i.e., unsecured) during bankruptcy—but only if the risk of default appears low.
Yes, it is possible to calculate a statement of cash flows from the other financial information that is provided by the debtor. However, is it really efficient for all of the “interested parties” listed on the mailing matrix to individually calculate this statement?
Although on one hand, sophisticated financial analysts (with significant economic self interest) will certainly calculate the statement of cash flows when larger amounts are involved. On the other hand, trade creditors (perhaps some with smaller amounts at risk) may not often have the time (or economic self interest) to calculate the statement of cash flows. Without this statement available, the analysis of the debtor’s financial health becomes more of a “crap shoot” for the unsecured trade creditor and more uncertainty usually translates to increased risk of a debtor’s default.
It appears to at least one unsecured trade creditor that the bankruptcy process would be facilitated by requiring the debtor to provide the statement of cash flows. Consequently, a New Year’s wish for 2005 is that the debtor’s required financial reporting includes a statement of cash flows!
Looking ahead to 2006, a New Year’s wish might be that the debtor provides the schedules and SOFAs (including the statement of cash flows) in an electronic format. A good format might be MS Excel, which is probably the most common financial spreadsheet program used by unsecured trade creditors.
Using the MS Excel spreadsheet format, the financial analyst can effortlessly transfer the information into most financial statement analysis software, whether standard or proprietary. This technology is widely available today. For example see www.edgar-online.com where financial information can be downloaded in an MS Excel format. (Although a subscription to this web site is required, a seven-day free trial was being offered at the time this article was written.)
With the statement of cash flows and other financial schedules in an electronic format, the time and effort required to analyze and interpret the financial health of the debtor would be substantially reduced.
So, “here’s to,” the advent of 2005. And may one unsecured creditor get his wish for both 2005 and 2006!