What is financial spreading?

Financial spreading, often called loan spreading, converts a borrower's balance sheets, income statements and tax returns into a consistent format with standard line items. Once statements are spread side by side across several periods, analysts can calculate ratios, measure trends and compare the borrower with peers. Spreads usually cover the business, and often guarantors' personal financial statements and tax returns as well.

Spreads feed nearly every downstream credit task: the cash flow analysis in the credit memo, debt service coverage and leverage calculations, risk rating models, covenant compliance testing and annual reviews. Many institutions require spreads for every commercial relationship above a set exposure. The quality of statements, whether audited, reviewed, compiled, company prepared or tax returns, should be recorded with each period.

Spreading errors propagate into every ratio built on top of them. Common problems include mapping the same item to different lines across periods, missing non-recurring items, mixing fiscal and calendar periods, and failing to update for restated figures. Manual keying is time consuming and error prone, so many lenders spend significant analyst time checking spreads rather than analyzing them.