| Posted by: mflanders Nov 4 2002, 01:50 PM |
Q1 - What are the pros and cons for using the UCA cash flow method versus EBITDA? It seems that many banks use one of these two methods.
Q2 - Is EBITDA commonly called Modified cash flow? |
| Posted by: loanuniverse Nov 4 2002, 03:02 PM |
Mflanders:
The type of cash flow method used by a bank is usually determined by a written credit policy or the credit culture prevalent in the institution. In the case of my current employer, both UCA cash flow and traditional cash flow are used to determine the debt repayment capability of the borrower with the major emphasis placed on the traditional cash flow and the UCA cash flow to determine the actual inflows and outflows of cash. If there is a major advantage or differentiation between the two, it is that is much easier to qualify for a loan using traditional cash flow By the way, We use EBIDA not EBITDA. We do not add back the taxes. Of course, a strong argument could be made for adding the taxes back…. We just don’t do it . On the other hand, from the perspective of a credit analyst, UCA cash flow provides a more accurate picture of where the money is coming and going.
A major shortcoming of the traditional cash flow is uncovered in the case of a fast growing company where accounts receivable and inventory are growing at a faster rate than sales. This is common in the case of small businesses with large customers. The small business might be showing a net profit, but the money might not have been received and will not be received for a while as the customers refuse to pay in time.
Regarding your second question, I would have to say no. EBITDA is not commonly called Modified Cash Flow. However, I am sure it has been called that many times when credit analysts and loan officers refer to it in credit analysis. As far as I know the most common use of the word modified in accounting is when it refers to a mixture of cash and accrual financial statements, which is not very common either. Usually your financial statements are one or the other .
I hope this answer is useful to you and thanks for the visit.
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