CASHFLOW ANALYSIS. Developed By Vin DiCara DiCara Training and Consulting Inc. PO Box 963 Brunswick, Maine

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1 CASHFLOW ANALYSIS Developed By Vin DiCara DiCara Training and Consulting Inc. PO Box 963 Brunswick, Maine Ask Questions Participate Relax and enjoy yourself Share your experiences CLASS RULES 1

2 PROGRAM OBJECTIVES Review the fundamentals of Cashflow Use Cashflow statements to understand the needs of borrowers Understand the value of projections to predict future cashflow challenges Structure complex financial deals CASHFLOW/SIMPLE VIEW The P & L contains the major elements of cashflow and repaymentability. The most common view of repaymentability: Profit After Tax + Depreciation + Interest and other hidden cashflow (rent savings, officer s salaries savings and nonrecurring charges) Distributions = Cashflow (CF)Available For Debt Service 2

3 DOES THE BUSINESS HAVE ADDITIONAL CASHFLOW? Rent Officer s Salary Non recurring expenses DEBT COVERAGE RATIO The Debt Coverage Ratio (DCR) is determined by using the following formula: Available Cashflow = DCR Annual Debt Service Most credit unions look for a DCR of 1.25/1 or better. It is important how you calculate cashflow and if you include all debt as debt service or just senior debt. 3

4 PERMANENT WORKING CAPITAL EXAMPLE PWC Required: A/R (Projected A/R Current A/R) + Inv. (Projected Inv. Current Inv.) A/P (Projected A/P Current A/P) Acc. (Projected Acc. Current Acc.) = New Investment in PWC PWC can be calculated on either an historical or projected basis PERMANENT WORKING CAPITAL Increases in PWC can be calculated on an historical basis or on a projected basis. Projected increases in PWC provide an indication of what kind of financing a business will require in the future for its operating needs as defined by its operating cycle. Historical increases in PWC show where some of a business cashflow has been used in previous periods of time 4

5 REPAYMENTABILITY ADJUSTMENTS Businesses use cashflow for purposes other than just debt service Cashflow is also required to fund the operations of a business (Permanent Working Capital increases) and to pay for investments in fixed assets, when 100% financing is not available To account for these other uses of a business cashflow, a number of adjustments need to be made CASHFLOW/ADJUSTED FORMULA Profit After Tax + Depreciation + Other cashflow (non recurring charges) Distributions Increase in Permanent Working Capital Cash outlays for fixed assets = Cashflow Available For Debt Service 5

6 GLOBAL CASHFLOW Also referred to as consolidated cashflow Takes into account both the business cashflow and the personal cashflow of owner/guarantors Important for closely held businesses Some business expenses flow through to the personal income tax return for those individuals who own S Corporations, Partnerships, and LLC s GLOBAL CASHFLOW Methodology uses information from the following: 1. The business tax returns 2. The tax returns of the owner/guarantors 3. The Personal Financial Statement of the guarantor(s) 4. The personal credit report 6

7 GLOBAL CASHFLOW By taking personal cashflow into account, an analyst might find additional means to service business debt On the contrary, an excessive lifestyle may reduce the ability to service debt if the owner/guarantor is too highly leveraged personally THE CASHFLOW STATEMENT 7

8 THE CASHFLOW STATEMENT The Cashflow statement is contained in the financial statements that accountants prepare. It is page three of the spreadsheet package It shows how a company has generated cash and how it has used it It identifies the sources and uses of funds between two periods of time (usually the end of fiscal years) It reconciles the balance sheets of the business by showing the inflows and outflows of cash CASHFLOW STATEMENT/ METHODOLOGY 1. Calculate Gross Funds Flow (GFF) Profit after Tax (PAT) + Depreciation and amortization 2. Reconcile Net Worth (Spreadsheet Page 2, line 67) 3. Reconcile Capital Expenditures (Spreadsheet Page 2, line 71). 8

9 CASHFLOW STATEMENT/ METHODOLOGY 4. All other items on Page 3 are derived from the balance sheet, comparing the various accounts between consecutive periods of time 5. Account for each item on the balance sheet (except for fixed assets and net worth accounts) 6. Line 103 should equal the year to year change in cash (Line 1, Page 1) 7. Do not make entries for the first year of balance sheet information. Begin with the second year CASHFLOW STATEMENT ANALYSIS Inflows of cash include: Gross Funds Flow (Line 74) Operating Sources of Cash (line 80) Non operating sources of cash (line 102) Outflows of cash include: Operating needs/uses of cash (Line 86) Non operating uses of cash (Line 96) 9

10 CASHFLOW STATEMENT KEYPOINTS 1. Net Operating Cashflow (Line 87) represents the cash that a business has after it has generated a profit (or loss) and met its operational needs 2. Growth increases the operational needs for cash for a business in most circumstances, unless that business can make operational changes, such as decreasing its receivables and/or inventory, or increasing its payables 3. Increases in operating uses of funds should be met by increases in operating sources of funds (except when increases in Permanent Working Capital occur) CASHFLOW STATEMENT KEYPOINTS 4. Increases in non operating cash uses should be met by increases in non operating sources of funds 5. Net operating Cashflow should be sufficient to pay the current portion of long term debt (principal) that is due (line 91) 6. Officer debt (or equity accounts) should not be repaid when net operating Cashflow is negative 10

11 FINANCIAL PROJECTIONS FINANCIAL PROJECTIONS Financial projections are important for a number of reasons 1. They often form the basis for determining a business ability to repay loans 2. They demonstrate the financial knowledge and understanding of a loan applicant 3. Projections also can increase credibility 11

12 PROJECTIONS Represent the final step in building on the results of historical analysis They are a look into the future Need to be based on reasonable and reliable assumptions KINDS OF FINANCIAL PROJECTIONS 1. Profit and Loss Statement 2. Balance Sheet 3. Cash Budget 12

13 PROJECTED PROFIT AND LOSS STATEMENT Projects sales and all expense items that are taxdeductible Usually does not include non tax deductible items such as principal payments on term debt or some meals and entertainment expenses The projected P&L shows how a company expects to utilize its resources DEVELOPING A PROJECTED P& L Step 1. Project Sales based on: Trends Orders Increased capacity Recent sales history Management objectives External competitive environment 13

14 DEVELOPING A PROJECTED P & L (cont d) Step 2 Project COGS based on : The business most recent trends (%) Any efficiencies Step 3 Project SGA based on: The business most recent trends (%) Any efficiencies DEVELOPING A PROJECTED P & L (cont d) Step 3:Project depreciation based on the expected depreciation of existing assets as well as assets that are to be purchased Example: A business has assets (buildings and M&E) which are being depreciated annually for an amount of $50,000. The business expects to purchase additional M & E for $150,000 to be depreciated over 5 years. Total projected depreciation = $80K 14

15 DEVELOPING A PROJECTED P & L (cont d) Step 4 Project officer s salary based on: Historical salary and loan covenants that restrict salary Step 5 Project interest based on: Interest for present and future debt service and adjustments for variable rate loans DEVELOPING A PROJECTED P & L (cont d) Step 6 Project rent, when applicable, based on existing and proposed lease agreements Step 7 Calculate any other income and expense items based on historical trends. For example, does the business regularly sell its fixed assets when it replaces them? 15

16 DEVELOPING A PROJECTED P & L (cont d) Step 8 Calculate earnings before tax (EBT) Step 9 Project taxes (for C corporations) using the appropriate federal and state tax tables and adjusting for any loss carryover or credits Step 10 Calculate profit after tax (PAT) PROJECTING THE BALANCE SHEET Step 1 Project Net Worth by adjusting net worth accounts for projected PAT and any new equity injections or payment of dividends or other withdrawals of equity. Calculate Total Net Worth Step 2 Project long term debt (LTD) and current portion of long term debt 16

17 PROJECTING THE BALANCE SHEET (cont d) Step 2 (cont d) Take into account both existing long term debt and any proposed long term debt. Remember to calculate the current portion of any long term debt and subtract any debt that will be paid off during the time period that the projections cover. Remember to include any long term leases, if applicable PROJECTING THE BALANCE SHEET (cont d) Step 3 Project accounts payable based on projected days accounts payable and projected COGS from P & L statement. Use the following formula Projected A/P= Projected Days A/P X Projected. COGS

18 PROJECTING THE BALANCE SHEET (cont d) Step 4 Project accruals based on projected days accruals and projected COGS. Use the following formula: Projected Accruals= Projected Days Acc. X Projected. COGS 360 PROJECTING THE BALANCE SHEET (cont d) Step 5 Project Short term debt (Note Payable Bank and others). Base on historical debt and owner s needs Step 6 Project other liabilities items such as officer debt, income taxes, deposits, etc. 18

19 PROJECTING THE BALANCE SHEET (cont d) Step 7 Calculate current liabilities and total liabilities Step 8 Add total liabilities to Net Worth Step 9 Insert the result of Step 8 in the Total Assets line Remember the accounting equation Assets = Liabilities + Net Worth PROJECTING THE BALANCE SHEET (cont d) Step 10 Calculate projected net fixed assets using the following formula: Current Net Fixed Assets (NFA) Projected Depreciation (from P & L) + Projected Cap. Expenditures = Projected Net Fixed Assets 19

20 PROJECTING THE BALANCE SHEET (cont d) Step 11 Calculate any other long term assets; e.g. intangibles based on history and the business plan Step 12 Subtract long term assets from total assets. The result is total current assets PROJECTING THE BALANCE SHEET (cont d) Step 13 Calculate other current assets such as prepaids or deposits Step 14 Calculate any notes receivable, either as current or long term assets 20

21 PROJECTING THE BALANCE SHEET (cont d) Step 14 Project inventory using the following formula: Projected Days Inventory X Projected COGS 360 PROJECTING THE BALANCE SHEET (cont d) Step 15 Project receivables using the following formula: Projected Receivables X Projected Sales

22 PROJECTING THE BALANCE SHEET (cont d) Step 16 Subtract all calculated current assets from total current assets (step 12) Cash is the plug figure If cash is negative, company cannot operate under the assumptions that have been made. Additional sources of cash need to be identified in the form of new equity or borrowings SPREADSHEET CALCULATIONS 22

23 SPREADSHEET CALCULATIONS Days Receivable= Receivables/sales X360 Days Inventory= Inventory/COGS X360 Days Payables= Payables/COGS X 360 Days Accruals= Accruals/COGS X360 Working Capital = CA CL Current Ratio= CA/CL Quick Ratio= Cash + Receivables/CL Days Cash= Cash/Sales X360 SPREADSHEET CALCULATIONS (cont d) % Sales Growth= current year s sales previous years sales previous year s sales Debt/equity ratio= Total Liabilities Sub. Officer Loans NW + Sub. Officer loans Intangibles 23

24 SPREADSHEET CALCULATIONS (cont d) Recon. Net Worth= Ending NW Profit After Tax Beginning NW = New Equity (withdrawals) Cap. Expenditures= Ending Net Fixed Assets +Depreciation Beginning Net Fixed Assets =Net Capital Expenditures SPREADSHEET CALCULATIONS FOR PROJECTIONS Projected Receivables= Projected Days Receivables/360 X Projected Sales Projected Inventory= Projected Days Inventory/360 X projected COGS Projected Payables= Projected Days Payables/360 X Projected COGS Projected Accruals= Projected Days Accruals/360 X projected COGS 24

25 SPREADSHEET CALCULATIONS FOR PROJECTIONS (cont d) Projected Net Fixed Assets (Cap. Exp.) Current Net Fixed Assets (NFA) Projected Depreciation (from P & L) + Projected Cap. Expenditures = Projected Net Fixed Assets Thank You! 2015 CUWebinars March 24 Mastering the Art of Cross Selling Vin DiCara DiCara Training and Consulting Inc. PO Box 963 Brunswick, Maine vdicara@dicaratc.com April 8 th - Best Ever Compliance Checklist for Consumer Loans April 16 - Repaying Loans: Cashflow, Collateral, & Personal Guarantees April 28 - Alert! FFIEC BSA/AML Exam Manual Changes TTS Info@ttsTrain.com May 5 th - Coaching Sticky Situations and Stinky People May 14 th - Job Shadowing May 20 th - Digital Signatures & Encryption June 3 rd - Handling Powers of Attorney 25

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