How banks assess cost of sales and business expenses before lending
Rising revenue does not prove debt service capacity. If purchase prices, payroll, logistics or fixed expenses grow faster than sales, no free cash may remain. This article explains checks on margins, costs, one-off items and financial headroom.
Banks examine the substance of costs, not just their total: which vary with sales, which remain when revenue falls, how transparent cost calculations are, and whether price increases can be passed to customers. Strong applications show margins by period and activity, explain deviations, reconcile management data to accounts and stress-test new borrowing.
Why rising revenue is insufficient
Loans are repaid from cash remaining after purchases, production, payroll, taxes, rent, logistics and other mandatory payments, not turnover itself. Identical revenue can therefore mean very different creditworthiness.
Discounts, expensive delivery and low-margin orders can increase sales while weakening repayment sources. Banks compare income and costs across periods, assess gross and operating margin stability and investigate sharp changes.
Cost of sales outgrows revenue
The company sells more but earns less per rouble of sales.
A high fixed-cost share
Even a small sales decline quickly creates operating losses.
Expenses are hard to substantiate
Management profit and loss reports do not reconcile to accounts and statements.
Margins depend on one factor
One supplier, exchange rate, tariff or major customer determines financial headroom.
How banks break down expenses
| Group | Examples | What the bank checks |
|---|---|---|
| Direct variable costs | Goods, materials, components and piece-rate pay | The link to sales volumes and actual gross margins |
| Logistics and fees | Delivery, card acquiring, marketplaces and customs charges | Full inclusion in product or order economics |
| Production overheads | Energy, repairs, quality control and factory upkeep | Allocation methods and capacity utilisation |
| Selling expenses | Advertising, sales, packaging and promotion | Recurrence and the return on customer acquisition spending |
| Administrative expenses | Offices, management, IT, audit and legal services | Fixed commitments and scope for optimisation |
| Payroll | Salaries, bonuses and social insurance contributions | Consistency with scale, seasonality and complete reporting |
| Interest expense | Bank loans, other borrowing and certain financial obligations | Total debt commitments and the new financing’s effect |
| One-off and related-party items | Write-offs, penalties, repairs and group-company services | Documents, market terms, recurrence and cash movements |
For trading, full purchase costs include logistics and losses. Manufacturing analysis covers materials, production yields, defects and utilisation. Services require payroll, staff utilisation and customer acquisition costs. There is no universal ratio set; sector and bank methodology determine the model.
Margin indicators to prepare
Shows what remains after direct cost of sales for other expenses, interest, taxes and profit.
Helps assess core operations before certain financial and other items.
Management analysis uses it to assess coverage of fixed expenses and debt payments.
Banks assess trends as well as levels. Lower gross margins may temporarily be offset by fixed-cost savings, preserving operating margin. Both margins falling usually indicates deeper deterioration.
- Compare monthly figures for at least the past year and year-on-year trends separately.
- Break margins down by product, activity, site or major contract.
- Show discounts, returns, defects, bonuses and exchange-rate effects.
- Explain differences between management and accounting cost of sales.
- Do not mix VAT, internal transfers or loan receipts with operating economics.
Expenses banks may normalise
Normalisation separates ordinary economics from events distorting one period. Add-backs need a clear basis and supporting documents. Banks may retain all or part of a potentially recurring item.
One-off repairs after an accident
Provide evidence of the event, work completed and non-recurring nature.
Launching a new activity
Assess costs alongside actual sales and time to target utilisation.
Related-company services
Check commercial substance, market terms and payments continuing after borrowing.
Depreciation
It is non-cash, but asset wear may require future investment.
How cost structure affects stress testing
After historical analysis, banks test adverse changes. Higher fixed costs and lower initial margins increase sensitivity to falling sales. Importers face currency and logistics risk; manufacturers face material prices and utilisation; contractors face rising costs under fixed-price contracts.
| Scenario | What to recalculate | Application question |
|---|---|---|
| Below-plan sales | Contribution margin and fixed-cost coverage | Which costs will actually fall with volumes? |
| Materials become more expensive | Gross margin and working capital needs | Can prices change, and after what delay? |
| A customer pays late | Cash flow, receivables and peak shortfalls | Will the facility suffice until actual payment? |
| Payroll rises | Operating margin and break-even point | Are productivity or selling-price increases substantiated? |
| New borrowing costs more | Payments and debt service coverage | Does headroom remain after interest and principal? |
A good stress test need not show profit under every shock. It identifies resilience limits and specific actions: pricing changes, lower purchases, deferred investment, a revolving facility or factoring, and additional owner participation.
Documents to prepare for the bank
| Document | What it should show |
|---|---|
| Monthly profit and loss statements | Revenue, cost of sales, gross profit and operating expenses |
| Cost of sales breakdown | Major items, quantities, prices and changed purchasing terms |
| Trial balances and account ledgers | Reconciliation of management tables to accounting records |
| Contracts and specifications | Supplier and customer prices and indexation rights |
| Statements for every account | Actual payments and complete transaction reporting |
| Cost calculations | Economics of products, orders, sites or services |
| Staffing and payroll | Fixed commitments, variable pay and seasonality |
| Budget versus actual | Forecasting quality and reasons for deviations |
| Cash flow and payment calendar | When profit becomes cash and where shortfalls arise |
| One-off item explanation | Basis, amount, documents and recurrence risk |
Align all reporting periods. If management gross profit cannot be reconciled to accounts, purchases and inventory movements, banks apply greater caution.
Example: revenue rises but borrowing headroom shrinks
A trading company increases annual revenue from RUB 120 million to RUB 150 million and requests a RUB 15 million revolving facility for inventory. Growth appears to be 25%, but cost of sales and operating expenses changed unevenly.
| Measure | Previous year | Current year |
|---|---|---|
| Revenue | RUB 120 million | RUB 150 million |
| Cost of sales | RUB 84 million | RUB 114 million |
| Gross profit | RUB 36 million | RUB 36 million |
| Gross margin | 30% | 24% |
| Operating expenses | RUB 24 million | RUB 28 million |
| Operating profit | RUB 12 million | RUB 8 million |
Turnover rose but gross profit stayed unchanged and operating profit fell by a third. Purchasing and delivery costs increased without being fully passed on. If all annual loan payments total RUB 7 million, headroom becomes minimal.
The company strengthens its application by showing higher prices in new contracts, an exit from an unprofitable product group, alternative supplier negotiations and monthly results of completed actions. The limit follows the actual peak shortfall, not a percentage of increased revenue.
Loan application preparation steps
Show monthly revenue, cost of sales, gross profit and expenses.
Identify direct, variable, fixed, financial and one-off items.
Compare periods and identify weaker products, activities or contracts.
Link profit and loss to trial balances, inventory, source documents and statements.
Record documents, amounts and recurrence risk for each one-off item.
Test falling sales, higher costs and delayed payments.
Show the activity financed by the facility and its margin.
A liquidity reserve should remain after every debt payment.
Mistakes that weaken an application
Showing turnover alone
High revenue does not replace sufficient margins and cash flow.
Using only average margins
Profitable activities may conceal loss-making products or contracts.
Omitting full logistics costs
Delivery, fees and returns can materially change sales economics.
Calling expenses one-off
Recurring items cannot be excluded without grounds and documents.
Not reconciling management accounts
Differences from trial balances and statements undermine the forecast.
Ignoring rising-price scenarios
Borrowing can increase working capital needs faster than profit.
Need to assess whether your business can support a new loan?
NG Finance helps Russian LLCs and individual entrepreneurs understand their finances before raising funds, identify actual needs and select a suitable financing instrument.
Request an assessmentFrequently asked questions
What margin is needed for a loan?
There is no single public threshold. Sector, margin stability, cash flow, debt commitments and transaction terms matter.
Does the bank use accounting or management cost of sales?
Both. Official statements are the base; management breakdowns explain economics where reconciled to records and documents.
Can a one-off expense be excluded?
An adjustment can be justified, but the bank decides. Documents and evidence of non-recurrence are needed.
Why can sales growth weaken an application?
Free cash flow falls if costs outgrow revenue or sales require excessive inventory and receivables.
Which matters more: gross or operating margin?
They answer different questions and are assessed together: sales economics versus results after operating expenses.
How is the owner’s salary treated?
Assess its commercial substance, regularity and market level. It cannot be automatically excluded.
Is a calculation needed for every product?
For large ranges, group products and identify key items generating most revenue and profit.
What period should the analysis cover?
Monthly figures for 12–24 months plus the current period are useful. The bank specifies exact requirements.
Conclusion
Banks value transparent links between sales, cost of sales, operating profit and cash. Clear margins, verified data, controlled fixed commitments and resilience after borrowing strengthen an application more than low costs alone.
Official materials
- Bank of Russia: guidance on Regulation No. 590-P and borrower financial assessment
- Federal Tax Service of Russia: state accounting statements information resource
- Russian Ministry of Finance: FSBU 5/2019 “Inventories” and determining actual cost
- Russian Ministry of Finance: accounting legislation changes and the “Expenses” accounting standard
This material is for information and does not guarantee loan approval. Banks use their own models, document lists and risk assessment rules.