Comprehensive Notes on Cash Flow Analysis and Case Studies

Calculated as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) minus debt service.
Debt service includes principal and interest payments.
Example:
- EBITDA: $1,348,000$
- Debt Service: $264,000 + 1,002,000 = 3,660,000$
- Debt Service Coverage: $1,348,000 / 3,660,000 = 3.66$
Another example of debt service includes current portion long-term debit paid: $2,530,000 + 1,500,000 = 4,030,000$
Still commonly used by bankers for analyzing C&I (commercial and industrial) and CRE (commercial real estate) loans.
May provide inaccurate information about the true cash available due to its lack of consideration for balance sheet changes.
Generally considered safe for real estate (CRE) but less so for C&I loans.

Net Cash After Operations (NCAO)
- Represents cash remaining after covering business operations.
- A negative NCAO indicates the company did not generate sufficient cash to cover operations.
- Example: NCAO of -$444,000 indicates a significant cash deficit.
Cash After Debt Amortization (CADA)
- Represents cash remaining after covering operations and debt payments.
- A negative CADA indicates a shortfall even after paying debts.

Traditional Cash Flow:
- EBITDA: $1,348,000$
- Debt Service: $366,000$
- Available for Debt Service: $1,348,000 - 366,000 = 982,000$
UCA Cash Flow:
- Deficit of $935,000$
The difference between the two methods is approximately $1,800,000$ , highlighting the impact of balance sheet changes.

Change in Receivables:
- An increase in receivables indicates sales for which cash hasn't been collected.
- Reduces cash available to service debt.
- Example: Receivables grew by $700,000$ , meaning that amount is not available cash.
Change in Inventory:
- An increase in inventory represents a use of cash (purchasing inventory).
- Reduces cash available to service debt.
- Example: Inventory increased by $573,000$ , representing a cash outflow.
Change in Payables:
- A decrease in payables represents a use of cash (paying down payables).
- Reduces cash available to service debt.
- Example: Payables decreased by $425,000$ , representing a cash outflow.
Combined, these changes can significantly impact available cash, potentially creating a financing requirement.

Reveals whether a company needs to borrow money to cover shortfalls.
May show a deficit even when traditional cash flow indicates a surplus.
Highlights the importance of external financing (owners' contributions, bank loans) to cover cash deficits.

Traditionally, bankers prefer using traditional cash flow for most credit analyses because they are more likely to approve the deal.
Senior management and board of directors may be more familiar with traditional cash flow than UCA cash flow.
Software can generate both traditional and FASB 95 cash flow statements.
For non-CRE customers, it's recommended to run both methods to understand the true impact on cash.

Growing companies often need to increase receivables and inventory, which consumes cash.
This growth is sustainable only if external financing is available.
If a bank cuts off lending, a company with a UCA cash flow deficit may face significant challenges.
Collecting receivables and speeding up inventory turnover can help generate cash but may not eliminate the deficit.

A company with a significant amount of money tied up in receivables and inventory.
Limited cash reserves.
Cash is being consumed in the operations of the business due to growth.
Has improving ratios that are not within their peer group.

Expanding operating cycle, indicating a need for more working capital.
Receivables, inventory turn, and payables are drawn out, creating a lengthy working capital conversion cycle.

Equity Injection: A capital contribution by the owner might be necessary.
Working Capital Line of Credit: If a line of credit is extended, it would be set up on a borrowing base, secured by eligible receivables and inventory.
- This requires monthly statements and discount rates applied to receivables and inventory.
- Example: Discount receivables by 70% (if under 90 days) and inventory by 50%.
Collateral: Limited collateral available other than buildings and improvements.
Receivables Collection: Determine governmental portions versus retail receivables, and look at the list of top vendors to verify information.

The company is currently "limping along" and is considered a problem company.
Newer regulators may recommend demonstrating an understanding of using UCA cash flow for C&I credits.

Factoring receivables can provide immediate cash but involves a discount (e.g., 10¢ on the dollar).
Impacts gross profit margin (e.g., 22% gross profit margin could be significantly reduced).

Traditionally, higher risk credits should command higher interest rates (reward).
However, competition may lead banks to price credits down to secure the deal.

Community banks should exercise caution when lending against floating assets due to the associated risks and maintenance requirements.

Owned by David and Helen Kruser (husband and wife).
Sells "large toys" such as wave runners, snowmobiles, ATVs, and small watercraft.

Single Pay Note:
- Existing building to be sold.
- Note matures soon.
New Loan:
- Financing for a new building in a shopping center: $390,000$ .
- Metal buffer building.
Letter of Credit:
- Required by a manufacturer to display motorcycles.

The borrowers (Crusers) own the real estate and lease it back to N Racing Products.
Primary source of repayment relies on the financial performance of N Racing Products.
Loss of entrance from the highway impact the company business. Current building sold, now the business wants to be moved to a pad site for easy access.
The borrowers have a contract to sell their current building. They want to start building the new location before selling. A weird request because the borrower's equity is tight to their current property and they don't have much else.

Weather's impact on business sales during warmer winter times and cooler summer times.
The existing loan is graded at a level