The 'Balance Sheet Illusion': Why Reported Ratios Make Borrowing Harder for Private Manufacturing SMEs in Canada

Abstract

The analysis illustrates, through case examples, how reported ratios distort profitability, liquidity, solvency, and efficiency measures—particularly through unadjusted customer deposit liabilities and discretionary management-fee distributions. In three firms, lenders asked for the owners' personal assets as additional security. The study proposes a leadership-to-balance-sheet causality model and recommends that lenders supplement covenant tests with qualitative context and adjusted measures.