Reading over your article on understanding UCA cash flow raises a question. Using the typical UCA cash flow template you have

Sales
+- A/R
- COGS
+- Inventory
+- Payables
- SG&A
+- Misc income/expenses
+- Other current and noncurrent accounts
= Net Cash After Operations

I assume you consider owner withdrawals discretionery, or do you still take that out? What about capital expenditures? Is this one of the items you said make sure everything is accounted for? Or do you consider this discretionery too? Therefore leaving both withdrawals and cap x out of NCAO when you calculate your DSC ratio.

I can understand why you would leave out owner withdrawals, but I cant understand why you would leave out capital expenditures.

I want to incorporate this ratio into our UCA cash flow analysis, but I want to make sure that everything makes sense to me first.

Thanks.

TeeDub

Tee:

NCAO = Net Cash Flow After Operations

The UCA cash flow does not stop at NCAO. The next two components deducted or added are debt amortization {withdrawals are included here}, and cash paid for plant and investment {what you call capex}. The resulting number is your financing surplus or requirement.

We use UCA’s NCAO to answer the question of ”Is the result of this company’s core operations enough to repay the debt?”. In other words, if I am looking at a shoe manufacturer, I want to be comfortable that making shoes is enough to repay the debt. I am not looking at some other lender taking me out with financing or the result of the sale of one of their plants.

I am also looking at the core operations to see if they are providing cash or eating it away.

Do I consider withdrawals discretionary? The answer is…. To a certain extent, yes. For an S Corp. I would expect the owners to take out their tax liability out. You also have to remember that as a lender, there are a lot of tools at our disposal {through the use of financial covenants} to make sure that the capital structure and debt repayment ability integrity is safeguarded.

There are times where I would perform two DSC calculations {one with and one without withdrawals}. This will be the case if we see an owner taking withdrawals in excess of profits.