What Is a Field Exam in Business Finance?

A field exam in business finance is a due diligence review used by lenders to assess the financial health and collateral value of businesses seeking financing. It provides an in-depth look into a company’s operational and financial records, helping lenders make informed credit decisions, especially in asset-based lending.

Understanding the Field Exam

A field exam is an inspection of a borrower’s assets to verify collateral support for a lending institution. It differs from a standard financial audit because its purpose is to assess collateral value and mitigate risk for the lender, rather than to provide an opinion on the fairness of financial statements. Lenders require field exams to gain confidence in the quality of financial information and validate asset values used to secure loans.

Lenders, particularly those involved in asset-based lending (ABL), utilize field exams to understand the true value of a company’s assets, such as accounts receivable and inventory, which serve as collateral. Businesses seeking asset-based loans or lines of credit undergo these examinations. The cost of a field examination is often borne by the business seeking the loan.

These examinations are commonly conducted by third-party firms, such as CPA firms or consulting firms, or by internal staff of the lending institution. Field exams help lenders determine if accounts receivable and inventory are sufficient to cover the outstanding loan balance in a potential liquidation scenario. They also provide insights into potential liabilities that could offset collateral collection.

Key Components of a Field Exam

During a field exam, examiners scrutinize specific financial areas and documentation to determine the eligibility and value of a borrower’s assets. This includes a detailed review of accounts receivable, inventory, accounts payable, cash, and sales and cost of goods sold.

Accounts Receivable (A/R)

The examination of accounts receivable involves reviewing customer invoices, aging reports, credit memos, and cash application processes. Examiners verify the validity and collectability of receivables, often by directly confirming balances with customers. They also assess the company’s credit policy and terms of sale. The report often includes a calculation of accounts receivable turnover and net collection, also known as dilution, which helps the lender determine appropriate advance rates.

Inventory

For inventory, examiners review records to understand valuation methods, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or Weighted Average Cost. They may conduct physical counts to verify existence and assess the condition and obsolescence of goods. The field exam also considers inventory eligibility criteria, such as age, location, and insurance coverage. Inventory turnover is also calculated, which directly impacts the marketability of the inventory.

Accounts Payable (A/P)

The review of accounts payable involves examining vendor invoices, payment terms, and aging reports to understand a company’s liabilities. This helps assess concentrations with specific suppliers and the historical trend of payables. Examiners also review internal controls around invoice processing, payment approvals, and vendor setup. The objective is to ensure accuracy, compliance with accounting standards, and efficiency in payment procedures.

Cash

The cash component involves examining bank statements and conducting cash flow analysis. Examiners assess the flow of cash into and out of the business, looking at operating, investing, and financing activities. This helps determine the company’s working capital and its ability to generate cash from core operations. The analysis ensures that financial records accurately reflect cash movements and that the company has sufficient liquidity.

Sales and Cost of Goods Sold (COGS)

Sales and Cost of Goods Sold (COGS) are reviewed to understand a company’s profitability and operational efficiency. COGS includes direct costs like raw materials, direct labor, and manufacturing overhead, but excludes indirect expenses such as marketing. Examiners analyze the relationship between sales and COGS to gauge gross profit and gross margin. This review helps determine if direct costs are managed effectively in relation to revenue generation.

The Field Exam Process

The field exam process begins with the lender initiating the request for the examination, often as part of their due diligence for a new loan or as a recurring review for an existing one. The scope of the examination is customized based on the lender’s specific requirements and objectives. This initial consultation ensures alignment on the key financial areas to be analyzed.

Before an on-site visit, the examiner requests various financial data and documentation from the borrower. This pre-visit information gathering allows the examiner to prepare and gain an initial understanding of the company’s financial records. The borrower should ensure their records are complete, up-to-date, and well-organized to facilitate a smoother process.

The on-site visit is a central part of the field exam, where the examiner physically comes to the borrower’s business location. During this visit, the examiner reviews physical documents, observes operations, and conducts interviews with key personnel, such as accounting staff and management. This direct observation helps the examiner assess the timeliness and accuracy of the company’s information flow and record-keeping practices.

After gathering information on-site, the examiner proceeds with analysis and verification. This involves in-depth scrutiny of the collected data, including performing calculations, cross-referencing documents, and conducting necessary confirmations with third parties, such as customers for accounts receivable. The examiner’s role is to validate the financial records and assess the quality and eligibility of the collateral.

Upon completion of the analysis, the examiner prepares and delivers a comprehensive field exam report to the lender. This report summarizes the findings, including an analysis of collateral eligibility, performance, and any identified risks or discrepancies. The report often includes a detailed schedule of borrowing base availability, indicating the excess or shortfall of available collateral compared to the loan balance.

Following the submission of the report, there may be post-exam communication between the lender and the borrower. The borrower should request a copy of the report for their records and review it for accuracy. This is an opportunity to discuss the findings with the banker and understand any implications for the loan agreement or potential operational adjustments.