A warehouse audit before a loan: presenting stock to a bank

A company asking for a loan usually gives the bank financial statements, turnover figures and documents on security. For a trading or manufacturing business, much of that security is often the stock in the warehouse. A bank officer looks not at the figure in the books but at whether the goods really exist, who owns them and whether they can be sold. If the stock appears in the documents but not in the warehouse, the loan may be refused or its terms made harsher. A warehouse audit before a loan closes that risk in advance. A reminder: every bank has its own requirements, so ask the bank's credit specialist for the exact conditions.

How a bank looks at stock

In general terms, a bank asks four questions about inventory:

• Existence: are the goods really there? A bank representative may visit the warehouse and count a sample.
• Ownership: do the goods belong to the company, and are they free of a pledge to another company or bank?
• Liquidity: do the goods sell quickly and at a good price? Seasonal, obsolete and near-expiry goods are worth little.
• Safekeeping: is the site secure, will the goods be damaged, is there insurance?

On each question a gap between the document and reality lowers the bank's trust.

Where companies stumble

Problems often seen before a loan:

1. The balance in the system differs from the actual one, and the bank's check finds this first.
2. Consignment or third-party goods sit within inventory but are shown as the company's own.
3. Slow and obsolete goods are carried at full cost when in fact they will have to be sold at a discount.
4. Pledged goods are regularly sold and replaced, but the procedure is not written down: which goods are pledged and which are not is unclear.
5. The warehouse holds heaps of goods with no documents or labels.

What an audit gives the bank

An independent audit prepares three documents: a count certificate for an agreed date, a reconciliation statement (system versus actual) and an analysis of stock (what sells fast, what sells slowly, what belongs to others). The auditor's conclusion is not binding on the bank, which will carry out its own assessment anyway. But a ready analysis speeds up talks and builds trust in the company. An important point: the auditor does not decide for the bank and does not "guarantee" the loan; he or she only documents the true state of the stock.

A hypothetical example

The books show stock of 1,800 million so'm. The audit finds the following (figures hypothetical):

• consignment goods of 150 million so'm, which the company does not own;
• goods with no movement for over a year of 300 million so'm, which are hard to sell;
• damaged and defective goods of 50 million so'm.

The part that can be offered as security, being real, owned by the company and liquid, is 1,800 − 150 − 300 − 50 = 1,300 million so'm. The bank will then apply its own discount to this sum, so it is important to know the right figure to offer in advance. If the company states 1,800 million in its application and the bank finds 1,300 million at the count, trust falls. A company that arrives with an audited 1,300 million looks open and dependable.

When to do it

Carry out the audit a few weeks before applying: fixing differences, putting documents in order and separating consignment goods all take time. After the loan is granted the bank may also check from time to time. If goods are pledged, the contract sets out how they must be stored and recorded. It is therefore better to put stock records in order beforehand.

Preparing for the bank's visit

A visiting bank representative usually asks to be shown items of their own choosing, to compare them with the system balance and to see the paperwork. Prepare in advance: item locations (rack and bin), a copy of the latest count certificate, receipts and supplier delivery notes, the insurance policy if there is one, and the list of people allowed into the warehouse. This groundwork shortens the inspection and shows the company is in order.

Conclusion

To a bank, warehouse stock is not a figure on paper but property that really exists, belongs to the company and can be sold. Audited stock confirms those three conditions with documents. Preparation takes weeks; a refused application costs far more time. OmborAudit prepares the count certificate, the reconciliation statement and the analysis of discrepancy causes, so you go into loan talks with exact figures.