Remote inventory test count procedures

Cascade Credit Services has successfully verified various inventories using remote procedures as part of a collateral exam since the start of the pandemic with its associated closures and travel restrictions. The following remarks assume the Lender and Borrower/Client have approved remote procedures in concept.

Many business meetings are now conducted as participants “work from home” using meeting apps such as Zoom, GoToMeeting, WebEx, Google, MS Team and similar tools. They can be used to conduct a “test count meeting” in a warehouse or plant – or outdoors – when it is not feasible for the collateral examiner to visit the location.

A. Planning is key: Is the warehouse well-covered with Wi-Fi? If not, is 4G LTE (cell bandwidth) fairly strong? If broadband Internet (preferred) is not reliable and cell service not strong, the meeting may not be feasible.

B. Choose a virtual meeting app, and the phone/tablet/laptop available to Borrower. Cascade subscribes to GoToMeeting and Zoho Meeting. We can also join other tools if a borrower prefers. Good idea to give it a 10-minute “dry-run” in the place where the inventory sits, to help ensure Examiner and Borrower can communicate, lighting is adequate, and know how to operate the app.

C. Set the time and resources: It is likely that two on-site staffers are needed – one to hold the phone/laptop/tablet, and another to locate and actually show (count) the items selected. Both the on-site staff and Examiner should record the counts as they are made. While the time commitment varies considerably, it is not uncommon that 2-4 hours or more may be needed to reach the required scope.

D. Selections are made according to required scope. We send them shortly ahead of the scheduled time giving some consideration for pre-work efficiencies by borrower…looking up locations/bins and maybe assembling dispersed goods to help video counts go faster. Again, planning is key. Remove items from freezer: technology does not work in super-cold environments.

E. Other considerations for normal test counts still apply, for example…
1. The Examiner needs to do all normal stuff as if physically there. Ask questions. Read labels, confirm quantities in a box. Confirm pallet/unit configurations. Open some packages.
2. Reconcile variances due to receiving or shipping/production, etc., using paperwork normally accompanying inventory transactions.
3. Get an overall tour of the facility, its security measures, etc.

Field Exams during the pandemic

We are open for Business!
All of Our Services are Available and All of our Locations Are Open

It is our primary goal as a company to keep each of our Team Members, and all our Clients, safe and to carry on our business consistent with health and safety amid current and coming developments.

Many collateral exam service requests are time sensitive. Delay means opportunities are lost, line changes do not get processed, new business doesn’t happen, commerce is not supported.

We stand ready to creatively and effectively get our part done. By all means send us those collateral exam assignments!

We have a seasonal business pattern which peaks now through at least September: if we hold off now, the backlog will pile up later and impact our industry’s ability to get assignments timely completed during the busy time.

Traveling to business sites is a feature of our work. Offices, warehouses and plants are impacted (downsized, working from home, shut down). In some cases, we must curtail or eliminate the site visit.

For several years, we have been performing Remote Exams for Lenders who are open to them and direct us in this way of serving their Borrower. All are aware of pluses and minuses, but ‐ especially in the circumstances ‐ the benefits outweigh concerns. And, the downside can be mitigated (see example below).

Let’s carefully plan each case and move it ahead if possible. Look at each project with consideration for:

  •  Necessary travel and methods of getting there: it may well be that domestic air travel for a time is shut down, and at minimum it may be advisable to avoid air trips.
  •  Maintain early and direct communications with all involved parties.
  • Strongly consider whether the project can be done “remote” with all requested documents and test work sent to Share file. We need your approval for this.
  • Everyone needs to commit to communication and cooperation to complete the assignment on a timeline/with urgency similar to if the exam were conducted onsite.
  • In all cases, manage closely the time on site, finish the analysis in the office.

We appreciate your business and look forward to helping you during these trying times.
Rich Denman
Managing Director

Cascade Credit Services’ Covid-19 pandemic protocols

During the Covid-19 pandemic collateral exam work has transitioned to remote work in most cases. In the rare event where circumstances require that an examiner go onsite, the following protocols are mandated for all Cascade employees:

• Physical and social distancing: Stay at least six feet – about two arm’s length – from customers and others whenever possible. Avoid shaking hands or other physical touch. Consider using a friendly tilt of the head as an alternative greeting. Seek to limit the number of people present in-person to less than 10 and avoid meals and other social activities with customers where practicing physical distancing is not possible.
• Face covering: Wear a disposable or cloth face mask when interacting in-person with customers, even if the customer chooses not to wear one. If a customer asks you to remove your face covering during your visit, politely decline and inform them of our policy requiring you to wear yours at all times during your visit with them.
• Self-health check: By entering the customer site, you are representing that you are healthy enough to do so per CDC guidelines. Stay home if you do not feel well or if you have any symptoms of COVID-19. You should also make a reasonable effort to confirm with your customer that no cases of COVID-19 have been reported at the meeting location within the past 14 days. If you have concerns about any symptoms your customer is displaying, it is okay to recommend rescheduling the in-person meeting for a later date.
• Hygiene practices: Use hand sanitizer before you enter the customer site and after coming in contact with any high-touch surfaces, such as elevator buttons, doorknobs, etc. Wash your hands or use hand sanitizer immediately after you leave the site. Take preventive actions to stop the spread of germs, avoid sharing pens and limit the exchange of physical materials where possible.
• Cleaning protocols: Use disinfecting spray or wipes to clean the surface of shared items. If the customer does not have these cleaning supplies readily available, use hand sanitizer or wash your hands after coming in contact with these items.
• Safety signage: Follow all health and safety instructions posted at the customer site, including elevator capacity limits, entrance and exit signage, etc.

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Operating Cycle

Collateral Exam vs CPA Audit, What’s The Difference?

Borrowers sometimes say, “I get an audit1 of our financial statements from our CPA each year. Why do the Collateral Examiners need to come out to our offices and do the same thing?”.

Companies borrowing on their trade receivables and inventories under a line of credit with their Lender are subjected to the scrutiny of both – and usually at the same time of year! Their loan officer must prepare a big analysis to renew the line of credit for another year. This process happens in the 3-4 months following the Borrower’s fiscal year end. The loan officer must synthesize an array of information to get the renewal approved: financial statements spread, compared and analyzed; industry analysis updated (tariffs anyone?); projections of the coming year’s business plans; and a review of the collateral performance – among other things.

What is the difference between the collateral examination and the CPA’s audit? At heart, it is a difference of scope and purpose. The scope of the collateral exam is focused on the “operating cycle”:

Operating Cycle

The CPA Audit, on the other hand, has responsibility for the financial statements as a whole – not just current assets and certain liabilities. So, where the Collateral exam takes a few days, the CPA audit may take weeks and costs significantly more. Collateral Examination firms or individuals (CEs) are not practicing as accountants, although CEs are trained to some degree in accounting and a few may have the CPA designation hanging on their wall.

Approvers of loans at financial institutions recognize that collateral is, at best, the secondary source of payment for the loan (possibly tertiary or even lower), if a business fails to cash-flow its way out of debt. The Lender needs to know, “What amount of cash could be realized out of the collateral?” This question is always in an unfavorable context – liquidation of the business, however remote that may seem today. This is where the CPA Audit and the Collateral Examination diverge: the CPA assumes a “going concern”.2 The CE cannot.

The liquidation viewpoint is a squishy sort of work: The CE uses asset-based lending3 underwriting rules of thumb, questions around the nature of the asset, and a certain level of judgment. Receivables at a construction subcontractor differ greatly from a distributor’s. Inventories at a manufacturing concern are way different compared to the wholesale distributor or retailer. The conversion of assets to cash to pay down the loan – how would that actually be done? What strategies – and costs – will be associated with keeping the lights and heat on in an extended liquidation period? The CE, in a few days, deals with these concepts in the abstract and based on the bitter historical experience of Lenders who have been faced with the reality of wringing cash out of a failed business.

For a business needing to leverage its receivables, inventory, their Lender needs to know a) the financial statements are reliable, and b) what the pledged collateral will realize if it were necessary to rely on it. The loan must be limited by the calculated collateral value discounted for the uncertainties that exist in every business and industry.

Both the CPA and the Collateral Examiner are key partners with the business in greasing the wheels of commerce.

Have questions or feedback? Contact us at info@cascadecredit.com!


1 Audit – via Google search: “A systematic examination of books, accounts, documents, and vouchers of an organization to ascertain how far the financial statements present a true and fair view of the concern.” Note: many small businesses do not get an Audit of their books by a CPA, rather a review or compilation may be engaged instead.
2 CPAs may add a “going concern” qualifier to the audit report if certain conditions are found, such as negative cash flows, defaults on loan agreements, adverse financial ratios, and other factors.
3 Asset-based lending is any kind of lending secured by an asset (Wiki). If the loan is not repaid, the asset is taken. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment.
Rich Denman at the SC Fraud Panel

Educating the Community: Washington Bankers Association

Rich guided the panel of experts in a discussion of occupational and cyber-fraud ‘Industry Update on Fraud’ at the Washington Banker’s Association Senior Credit Conference in Seattle on 3/21/19.

Joining Rich were:

    • Kristin Beaulieu, VP of Woodruff-Sawyer Co.
    • David Porter, Shareholder at Geffen Mesher, CPAs
    • Jason Thomas, Director at Cook Security Group and
    • Devon Nevius, President of Upward Technology