The Three Diagnostics
What are the Three Diagnostics, and what do they test on a working capital request?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
The Three Diagnostics are three tests run in sequence on any working capital request, to distinguish a borrower who needs capital because they are growing from one who needs capital because they are deteriorating. Is the growth real — volume rather than price, receivables moving with sales, the industry confirming it. Is the cash conversion intact — operating cash flow against net income, the cash conversion cycle, and the underrated trend in payables days. Does the structure match the need — a revolving facility that flexes with the trade cycle rather than term debt that does not. They cut both ways: when the three say growth, the discipline is to believe them and approve quickly.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// IN THE BOOK
Developed in chapter 3, Reading Real Demand vs. Plugging Holes.
// WORKED IN
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